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ELEMENTARY PRINCIPLES OF ECONOMICS 

REVISED 



•The 



THE MACMILLAN COMPANY 

NEW YORK • BOSTON • CHICAGO • DALLAS 
ATLANTA - SAN FRANCISCO 

MACMILLAN & CO., Limited 

LONDON • BOMBAY • CALCUTTA 
MELBOURNE 

THE MACMILLAN CO. OF CANADA, Ltd, 

TORONTO 



ELEMENTARY PRINCIPLES 
OF ECONOMICS 



TOGETHER WITH A SHORT SKETCH 
OF ECONOMIC HISTORY 

BEVISED 
BY 

RICHARD T. ELY, Ph.D., LL.D. 

PROFESSOR OF POLITICAL ECONOMY IX THE UNIVERSITY 
OF WISCONSIN 

AND 

GEORGE RAY WICKER, Ph.D. 

PROFESSOR OF ECONOMICS IN DARTMOUTH COLLEGE 



THE MACMILLAN COMPANY 

LONDON: MACMILLAN & CO., Ltd. 

1918 

AU rights reserved 



\A^n\ 






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h 



COPTKIGHT, 1904 AND 1917, 

By the MACMILLAN COMPANY. 



Set up and electrotyped. Published May, 1904. Reprinted 
November, 1904; July, 1905; September, igo6; January, July, 
September, 1907; January, 1908; July, 1909; February, June, 
1910; February, July, 1911; July, 1912; April, November, 
1913; January, June, 1914. 

Revised edition, published June, 1917. Reprinted October, 
1917. 



By Transfer 

0. C. Public Llbraiy 

AUG 1 7 1934 



Nortoooli Jlreas 
S. Gushing Co. — Berwick & Smith Co. 
Norwood, Mass., U.S.A. 



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PEEFACE TO THE FIRST EDITION 

In offering this textbook to teachers and students of 
economics, the authors feel that a brief word of expla- 
nation and suggestion may afford help in judging the 
quality of the book as well as in the use of the book, 
should favoring judgment result in its adoption for class- 
room work. 

It has been the aim of the authors first of all to make 
the book teachable. In choice and rejection of substan- 
tive and illustrative material and in its arrangement ; in 
the form of the chapters, paragraphs, sentences, and words ; 
in all that can affect the ease or difficulty of conveying an 
understanding of economics to the beginner, this compli- 
cated quality of teachableness has been earnestly and con- 
stantly sought. 

Fortunately for the welfare of the science of economics, 
there is more or less disagreement among economists as 
to many points of theory. But manifestly an elementary 
textbook on the subject is not a place in which conflicting 
views should be presented and discussed, even if space 
would permit. Nor have the authors wished to use the 
pages of the book for the propagation of views in which 
they might chance to differ with other economists. It 
has seemed best to regard constantly the purpose of the 



VI PREFACE TO THE FIRST EDITION \ 

1 
book as a text, and hence to subordinate individual opin- i 
ion to the general good of the student. Here, as in many 
another question of choice. Pope's rule may well apply : — 

" Be not the first by whom the new is tried, 
Nor yet the last to lay the old aside." 

In the main, therefore, and so far as the authors have | 
been able, they have presented the outlines of theory in j 
the form in which they are to-day most generally accepted ! 
by economists, leaving for later and advanced study the ! 
conflicting assumptions and arguments and points of view ; 
of economists who may be paving the way for the most ■ 
acceptable textbook of a coming decade. I 

An examination of the book will show that scattered 
passages, amounting in the aggregate to many pages, have i 
been printed "solid," i.e. without the interlinear spaces s 
regularly used. Such are the passages which, either from ; 
their greater difficulty or from their subsidiary character, ] 
may best be omitted by a teacher pressed for time. More- ; 
over, for classes in which the time limits are too narrow i 
to permit careful study of the whole text, it may be found ' 
expedient to omit Book IV, on Public Finance. ; 

It is perhaps unnecessary to add the word of caution ' 
that the summaries and questions at the close of the chap- i 
ters may easily become a hindrance rather than a help to \ 
real thought and study if the teacher permit himself or ! 
his class to fall into slavish reliance upon them. Like the : 
references to collateral reading, the questions and sum- i 
maries are to be used as starting points and guides to \ 
further study and discussion. ' 

It has been the hope of the authors, moreover, that the | 
material carefully elaborated in the appendixes may not I 
only help to guide both teacher and class during the ; 

i 



PREFACE TO THE FIRST EDITION VU 

period of the formal study of the book, but may also en- 
courage and direct the student in the after days of his 
professional or business or political life. 

RICHARD T. ELY, 
GEORGE RAY WICKER. 

Hanovbk, N. H., 
1904. 



PREFACE TO THE SECOND EDITION 

The reception accorded this book in the thirteen years 
since its first publication, a reception which has gratified 
even more than it has surprised the authors, perhaps justi- 
fies a word of appreciative acknowledgment to the thou- 
sands of teachers who have contributed to its success. 
They may share the authors' gratification in knowing that 
a Japanese translation has found wide acceptance in the 
schools of Nippon ; that the regular edition has been used 
in England, Canada, Australasia, and other English-speak- 
ing lands ; and that more recently Mr. L. L. Price, the 
distinguished English economist, has revised the book, 
and, by utilizing more fully the national experience of 
the United Kingdom and employing English monetary 
terms and illustrations, has adapted it better to the 
schools of our British cousins. The authors in this re- 
vision have availed themselves in various places of im- 
provements in style and substance made by Mr. Price, 
and gladly acknowledge their appreciation and their 
indebtedness to him. 

So wide an acceptance has proved to the authors at 
once a challenge and a menace : a challenge to their best 
efforts in making the book better ; a menace in the fear 
lest in some subtle way their best efforts at improvement 
might go astray. Bold caution seems to be the injunction 
laid upon them by the measure of their earlier success. 



X PREFACE TO THE SECOND EDITION 

All descriptive and illustrative material has been very 
carefully recast, except in the few cases where it was evi- 
dent that the older illustration was to be preferred. The 
theoretical treatment has been as carefully reconsidered. 
Wherever a simpler, clearer, better statement could be 
devised, the old has given place to the new. Wherever 
changes of theory have won their way into general accept- 
ance within the last decade, there has been no hesitation 
or reluctance in adopting the change. Truth may be 
eternal, as Lowell wrote : — 

" but her effluence, 
With endless change, is fitted to the hour." 

One limitation, seriously felt by the authors, they have 
not been able to break down or evade. Several lesser 
topics, vital, timely, and often closely related to the eco- 
nomics of our country, — such as immigration, the con- 
servation of natural resources, and the economic position 
of women, — could find admission only by an impracticable 
enlargement of the book or by displacing other material 
which seemed to have at least equal claim to inclusion. 
Selection was demanded. Here critic and author should 
alike be bound. 

The kind criticism of a host of students, teachers, and 
friends, and the particular, searching, and good-natured 
criticism of some thousands of the junior author's own 
students in Dartmouth College, the corpus vile sed 
dilecturn of his experiments in teaching during sixteen 
college generations, should show its influence in this 
revision ; we hope and confidently believe that such an 
influence will be traced. More particular acknowl- 
edgment is due to Professors F. H. Dixon and C. A. 
Phillips, and Mr. J. M. Shortliffe, of Dartmouth College, 



PREFACE TO THE SECOND EDITION XI 

who have brought their own experience in using the earlier 
text as their contribution to the common purpose of shap- 
ing a book that may best fit the needs of American stu- 
dents in school and college. 

RICHARD T. ELY, 
GEORGE RAY WICKER. 



PREFATORY NOTE BY THE SENIOR AUTHOR 

While Professor Wicker and I have both worked hard 

and long on this book, going over it together word by 

word, discussing it at length point by point, I deem it 

only fair to say that the major portion of the toil has 

been his, that to him belongs the final literary form of 

nearly the whole work, and that to him is due chiefly the 

credit for whatever improvements in style and theory this 

edition shows over the first. 

RICHARD T. ELY. 

Madison, Wisconsin, 

June, 1917. 



CONTENTS 

BOOK I 
INTEODUCTORY 

CHAPTER PAGE 

I. Preliminary Remarks on the Nature of Economics 1 
II. The Principal Divisions of Economics ... 5 
III. Fundamental Institutions in the Existing Socio- 
economic Order 8 



BOOK II 
A BRIEF SKETCH OF ECONOMIC HISTORY 



I. Introductory 

II. Early Stages of Industrial Development 

III. The Industrial Stage 

IV. The Industrial Stage in England 

V. The Industrial Stage in the United States 



21 
28 
43 
51 
75 



BOOK III 
ECONOMIC THEORY 



I. 
II. 



PART I 

CONSUMPTION 

Introductory: Utilities and Goods 
The Law of Diminishing Utility 



91 

98 



XIV CONTENTS 

CHAPTER PAGE 

III. Demand . 104 

IV. The Economy op Spending and Saving . . . 116 



PAET II 

PRODUCTION 

I. Introductory 126 

11. The Factors of Production 136 

III. The Organization of Production . . . . 155 

PAET III 

TRANSFER OF GOODS 
(Exchange) 

I. Introductory 178 

II. Value 183 

III. Monopolies and Monopoly Value .... 204 

IV. Money 225 

V. Credit and Banking ..*.... 244 

VI. International Trade 262 



PART IV 

DISTRIBUTION 

I. Introductory » » . 291 

11. Rent . 296 

III. Wages and the Labor Problem 312 

IV. Interest 339 

V. Profits 358 

VI. Socialism , , . .868 



CONTENTS XV 

BOOK IV 
PUBLIC FINANCE 

CHAPTER PAGE 

I. Expenditure and Revenue 384 

XL Revenues in the United States 399 

APPENDIX I 
Subjects for Essays, Discussions, and Debates . . 419 

APPENDIX II 

Courses of Reading 426 

Index 439 



BOOK I 

INTRODUCTORY 

CHAPTER I 

PRELIMINARY REMARKS ON THE NATURE OF 
ECONOMICS 

Although the whole book which follows is but an expanded 
definition of economics, the student who is about to enter 
upon a study of the subject may well wish to have explained 
to liim in advance, at least in rough outlines, what is the field 
into which he is about to enter. At the outset, therefore, let 
us attempt to frame some idea of the nature of the science 
and of the group of sciences with which it is most closely 
connected. 

The Place of Economics among the Social Sciences. — 
First of all, economics is a social science. That is, it deals 
with man in his relation to society. But there are other 
social sciences besides that which we are about to study; 
among them history, political science, and sociology. ^ 

The question therefore naturally arises, How is our science 
distinguished from the others ? To answer this question, we 
must consider more closely the different aspects under which 
society may be viewed. From the first, men in society have 
been busy in various lines of effort, which for convenience 
we may group as follows : language, art, education, religion, 

B 1 



2 ELEMENTARY PRINCIPLES OF ECONOMICS 

family life, social life, — in the narrow sense of that term, — • 
political life, and economic life. It is with the last of these 
eight spheres of human activity that our science has to deal. 
By the term " economic life " is meant, roughly speaking, 
that part of human activity which is devoted to getting a 
living. 

A peculiar feature of these activities is that they are ail 
collective; that is, they are activities which one man cannot 
well carry on alone. In the case of family and political life 
and some of the others this is at once obvious. Careful ex- 
amination shows it to be true of them all. It is for this reason 
that the sciences which deal with them are called social 
sciences. 

Preliminary Definition of Economics. — Economics, then, 
is the science which treats of those social phenomena that are due 
to the wealth-getting and wealth-using activities of man. It deals 
with all those facts about society that result from man's 
effort to get a living. The wealth-getting activity itself we 
call economic activity. The economic life, or the relations to 
which the economic activity gives rise, we may call by the 
simple word " economy." With this understanding, we may 
say that economics is the social science that deals with the eco- 
nomic life, or the economy, of man. 

The Economic Unit. — If we keep in mind this meaning of 
the term "economy," we shall see that there are economies of 
various sorts. Thus, the economy of the ancient Greek house- 
hold, with its slaves and dependents, is different from that of 
the medieval city or of the modern nation. In this book 
we study the economy of the world or the nation as a unit, 
with individual, household, city, and state as subordinate 
economies. 

The eight different human activities which have been 
enumerated cannot be entirely separated in thought any 



REMARKS ON THE NATURE OF ECONOMICS 3 

more than they are actually separate in real life. Thus legis- 
lation, though it belongs primarily to the province of political 
science, has an intimate bearing on economic life. Again, 
industry in Russia is seriously hampered by the frequent 
recurrence of saints' days, which have therefore great 
economic importance ; and even in Bavaria within a few 
years the number of saints' days was lessened by action of the 
state with the approval of the church ; but saints' days have 
primarily to do with religion, not with economics. In the 
same way, economic life is dependent upon all the other 
groups of human activity. 

Final Definition of Economics. — It is evident, then, that a 
complete definition of economics must be made broad enough 
to take note of this fact. We may sum up all these considera- 
tions in a final definition, as follows : Economics is the science 

(1) which treats of those social phenomena that are due to the 
wealth-getting and wealth-itsing activities of man; and which 

(2) deals with all other phases of his life in so far as they 
affect his social activity in this respect. 

SUMMARY 

1. Economies is a social science. 

2. Each great department of social life has its appropriate science. 

3. Economies is the branch of social science that deals with the 

phenomena to which the wealth-getting and wealth-using 
activities of men give rise. 

4. Economies deals also with all the other social phenomena in so 

far as they affect economic activity. 

QUESTIONS FOR RECITATION 

1. Into what different groups may man's social activities be divided ? 

2. With which group does economics primarily deal? What con- 

cern has it Avith the others? 

3. What have the different groups in common? 

4. What is economics? 



ELEMENTARY PRINCIPLES OF ECONOMICS 



QUESTIONS FOR STUDY AND DISCUSSION 

Name five of the most important public questions of to-day. 

What ones are primarily economic? Trace indirect economic 

relations of the others. 
How large a part of our lives is concerned with matters that are 

essentially and directly economic? 



LITERATURE 

The teacher may find it advisable to supplement the text of 
this chapter with a discussion of the meaning of science and other 
broad and fundamental concepts. As a basis for such discussion, 
Karl Pearson's Grammar of Science is unexcelled. 



CHAPTER II 
THE PRINCIPAL DIVISIONS OF ECONOMICS 

Economics is a science which covers so wide a field that 
it has been found desirable to divide it into parts, each of 
which is often treated by writers in separate works or in 
separate volumes of the same work. It may help the student 
to have outlined for him, in advance, the divisions as they 
will be presented in this work. 

First of all, it has been thought best to present to the 
student in the opening chapter an idea of what the science 
is, and to show him, as is being done in the present chapter, 
what are the main topics with which the science is concerned. 
In another introductory chapter there is presented a discus- 
sion of some of the fundamental institutions in our social 
order. 

In the second place, it is thought advisable to give in 
a few chapters a skeleton outline of the economic history of 
mankind, with more particular attention to those late 
developments in English and American economic history 
that have given rise to existing economic conditions. This 
part of the subject is often omitted from elementary text- 
books, and therefore a word of explanation is here in place. 

Few students undertake the systematic study of economics 
without having pursued courses in history ; but the histories 
usually studied in schools are devoted in great part to other 
than economic considerations, and are written from another 
point of view than that which should be ours in our present 
study. It is of the utmost importance that the student 

5 



6 ELEMENTARY PRINCIPLES OF ECONOMICS 

sliould approach the study of present economic conditions 
imbued with the historical spirit. As the chapters on 
economic history will show, social and economic institutions 
are not permanent, but constantly changing ; and to under- 
stand aright what is, we must know whence it has developed, 
and, so far as we can, whither it is tending. Moreover, the 
study of economic history should show the student, as per- 
haps nothing else can, that great changes in the economic 
condition of a nation or a class do not come about in a 
moment at the command of an individual or of a great number 
of men organized in a state, though the will and the action 
of individual and state are powerful forces. 

The way will thus be made clearer for that which is more 
commonly presented in textbooks under the name of 
economics or political economy. An analysis of economic 
phenomena at any time shows that these may be divided 
for purposes of clearer study into four main parts: first, 
those connected with man's consumption of goods, or, in 
other words, with the satisfaction of his wants; second, 
those connected with the production of goods ; third, those 
connected with the exchange or transfer of goods among 
men ; and fourth, those connected with the distribution of 
the income of society among the individuals, classes, and 
factors of production which cooperate to create that income. 
By dividing thus the general subject of economic theory, 
we are enabled to look at man's economic life from four 
points of view. The four divisions which we have indicated 
are usually treated under the following headings : consump- 
tion,' production, transfers or exchange, and distribution, and 
we shall discuss them in that order. 

Certain socio-economic problems of great present interest 
will, on account of their special importance, be treated at 
considerable length in those divisions of the general subject 



THE PRINCIPAL DIVISIONS OF ECONOMICS 7 

to which they have a logical relation. Thus, under the head 
of transfers or exchange, we shall discuss the subjects of 
monopolies, bimetallism, and protective tariffs, and under 
the head of distribution, many of the practical problems 
concerning labor and wages. 

Finally, the financial relations and operations of govern- 
ment, national, state, and local, are of a nature so important 
to the welfare of the citizen, and in some respects so peculiar, 
that it is thought well to treat them separately in chapters 
devoted to the subject of public finance. 

SUMMARY 

1. For convenience of treatment, economics is usually divided into 

several different fields of study. 

2. The present book begins with an introduction explaining the 

nature and scope of the science. 

3. A sketch of economic history is given to prepare the student 

for a better understanding of present conditions and problems. 

4. Economic theory is presented under the four general headings : 

consumption, production, transfers (or exchange), and dis- 
tribution. 

5. A short presentation of the subject of public finance is added 

to give the student a more complete idea of the nature of 
economics. 

QUESTIONS FOR RECITATION 

1. What subjects are discussed in the introductory chapters of 

this book? 

2. Why is it thought wise to include economic history ? 

3. What are the usual main divisions of economic theory? In 

what order are they given in this book? 

4. What is the meaning of distribution as a division of economics? 

5. Of what does public finance treat? 

QUESTIONS FOR STUDY AND DISCUSSION 

1. What are the relations of consumption and production? 

2. In what sense is exchange a part of production? In what 

sense is distribution a part of exchange? 

3. Name some of the chapter topics in this book which you think 

might properly have been placed in other connections. 



CHAPTER III 

FUNDAMENTAL INSTITUTIONS IN THE EXISTING 
SOCIO-ECONOMIC ORDER 

In every civilized state to-day there are certain conditions 
under which men carry on their economic activities, so 
fundamental in their nature that we do not often stop to 
consider them. So deep-lying are they and so long estab- 
lished that we easily fall into the error of thinking of them 
as necessary to the very existence of society under all con- 
ceivable circumstances. Yet careful consideration will con- 
vince the student that this is far from the case. Let us, then, 
consider in detail some of the more important of these funda- 
mental institutions in the existing order of economic society, 

I. Property 

By property we mean an exclusive right to control an economic 
good. ' 

By private property we mean the exclusive right of a private 
person to control an economic good. 

By public property we mean the exclusive right of a political 
unit (city, state, nation, etc.) to control an economic good. 

A. Private Property 

The right of private property is so fundamental in our 
modern civilization that we hardly think of it as resting on 
the will or consent of society, maintained only by constant 

8 



FUNDAMENTAL INSTITUTIONS 9 

, vigilance on the part of society, and subject even now to 
slow and gradual modification. Still less, perhaps, has it ever 
appeared to most of us as a right that is open to question. 
The reason for this attitude of mind is that people are ruled 
in great measure by custom rather than by the light of his- 
tory and of reason. When any customary right has spread 
very widely and become deeply rooted in society, men fall 
into the error of calling it a " natural right." There is, to be 
sure, a sense in which the property right maybe called natural, 
namely, that the right has been rather the result of a natural 
evolution than of any conscious convention. But, as usually 
employed, the term natural right implies that the right is 
" established by nature " and hence is not to be called in 
question. In reality there are no such rights. A man in 
isolation could obviously have no " rights " whatever. The 
word rights necessarily implies society, and points to the 
origin of rights not in any abstract nature, but in the group- 
ing of men. All true rights are or should be rational — 
rights which can show good reason for their claims, and can 
justify their existence on the ground that they promote 
human welfare. 

Yet it must be noted that the very fact of the long-con- 
tinued existence of any social institution furnishes strong 
presumptive evidence that the institution has ministered to 
social welfare. Therefore, those who appeal to the law or to 
public opinion to overthrow or to abate the force of the 
institution have to bear the burden either of showing that 
social conditions have so changed as to destroy the beneficent 
operation of the institution, or of offering very strong evi- 
dence that some other institution would better subserve the 
end. 

Beginning of the Right of Private Property. — On looking 
into the history of private property, we find in the first place 



10 ELEMENTARY PRINCIPLES OF ECONOMICS 

that, as a clear and distinct concept, it has not always existed 
among men. It is probable that the sense even of tribal 
ownership or property was a slowly developed product of 
civilization. The idea of private property was of still slower 
and later growth. The savage at first owned nothing. 
Doubtless, even in very early times, when the primitive man 
had caught or killed an animal, he considered it more or 
less his, though even in such cases it was the common prop- 
erty of his family or tribe rather than the exclusive property 
of the individual. From insignificant beginnings, especially 
from the possession of personal articles of clothing and 
adornment, the right or feeling of ownership has grown, 
including more and more things and dividing the ownership 
more and more, until at last nearly everything is owned and 
nearly everyone owns something. Not until a rather ad- 
vanced stage of civilization had been reached did land be- 
come property, and even to-day the last forms of tribal owner- 
ship of land have not everywhere, even among civilized 
peoples, given place completely to individual property. 

Strengthening of the Right. — In the second place, it is 
only in comparatively recent times that private ownership 
has been either so exclusive or so extensive as it is at present. 
It is not many centuries since a Scottish clan held the right 
to the territory it occupied so absolutely that no chieftain, 
however powerful, could abridge the right. To-day, there 
are tracts of country in Scotland almost stripped of their 
agricultural population, with game rather than men finding 
a living on these estates. Slowly, however, a reaction has 
set in, and most nations are now beginning to enforce and 
extend their public claims and are developing the social 
side of private property. 

Limitations to the Right. — In the third place, we find 
that even to-day private property has certain sharp limitations 



FUNDAMENTAL INSTITUTIONS 11 

which indicate whence it springs and from what source it 
draws its being. Society, through the state, even now says 
to the individual citizen, " Thus far shalt thou go, and no 
farther," By its action it shows that it is the grantor of 
private rights, and that it may withdraw them whenever 
such a course will be to its advantage. Let us consider some 
of these limitations. 

1. Limitations to Private Property imposed by Society in 
its Own Behalf. — 1. Taxation. — The first of these limita- 
tions exists in the taxation of private property, which from 
one point of view may be regarded as simply the taking by 
organized society for its own uses of a part of the value of 
what it has left to the private ownership of its citizens. 
Taxation, as understood to-day, is a comparatively recent 
activity of the state. During the Middle Ages the right of 
the state to take private property for its support was stoutly 
opposed, and there was a strong tendency to regard all taxa- 
tion as extortion. To-day the right of taxation is almost 
universally conceded. Taxation is perhaps the most extreme 
limitation imposed upon the right of private property by 
society in its own behalf. 

2. Eminent Domain and Requisition. — A second limita- 
tion exists in the right of organized society to appropriate 
to itself specific pieces of property with direct compensation 
to the private owner. This right is exercised especially in 
time of war, as when the nation for its military needs takes 
cattle for the subsistence of its troops or wagons for their 
transportation. Such an assumption of proprietorship is 
known as requisition. But in times of peace the government 
often takes for its own purposes, with due compensation, 
land or other property, under the exercise of what is known 
as the right of eminent domain, — words which in more 
common language simply mean ultimate ownership. 



12 ELEMENTARY PRINCIPLES OF ECONOMICS 

3. Fines, Forfeits, and Escheats. — Fines, imposed and 
collected by government, form a third clear limitation upon 
the absoluteness of private property. A fine is a money 
■payment exacted hy the state as a penalty for some offense 
against the law. When, instead of money, other property of 
the offender is taken, the name forfeit is used. Escheat is 
the name applied to property which reverts to the state through 
the death of the former owner without a will and without heirs. 
The word is also used to name the form of reversion in such 
cases. 

II. Limitations directly in Behalf of Individuals. — The 
three limitations just described are such as society sets up 
directly in its own behalf. But there are still others, enforced 
by society not directly for itself but for individual citizens. 
(1) The first is the exercise of the right of eminent domain in 
behalf of individuals or corporations. If a regularly chartered 
railway company is unable to make terms directly with the 
owner of land over which it proposes to lay its tracks, it 
can secure possession by appealing to the government, 
which compels transfer of the property for compensation. 
It should be noticed, however, that in ail such cases it is 
presumed that a superior public purpose is to be served by the 
company. 

Moreover, there is a vast system of limitations upon the 
use, or rather the abuse, of private property, which are 
designed to prevent the individual from injuring himself or 
others. We need not enter into an extended description of 
these limitations. Generally speaking, (2) no man may use 
private property to maintain a public nuisance. As the 
Latin law phrase has it : Sic utere tuo ut alienum non 
laedas; i.e. So use your property as not to injure another's. 
Nothing is more fallacious than the idea that the right of 
ownership allows a person to do as he pleases with his prop- 



FUNDAMENTAL INSTITUTIONS 13 

erty. It is true that rights of private property have 
sometimes been so defined as to permit many abuses to go 
unpunished, but it has been the tendency of society so to 
limit the rights as to exclude abuses. Whenever any given 
right has proved generally unfavorable to the welfare of 
society, society has modified or abolished that right, or, 
failing to do so, has endangered its own stability. How- 
ever, we must frankly recognize that, as law operates in 
accordance with general principles, many abuses exist that 
cannot be remedied by law. The problem is to prevent 
wrong use without impeding right and desirable use. If 
the student thinks seriously about this, he will discover many 
cases of a wrong use of property which at the same time 
cannot be corrected by any general rule. For if the attempt 
is made to form a general rule to prevent the particular 
abuses, it will be seen that the same rule would in many 
cases prevent a right use. It is within the spirit of the law 
to go as far as possible by general rule ; as time goes on we 
learn how to prevent an increasing number of wrong uses of 
property. But after we have done our utmost, there will 
still remain a large field of wrong uses which can be cor- 
rected only by individual action or by associated efforts 
of a private sort. 

B. Public Property 

Public property, as defined above, refers to an exclusive 
control of some political authority and is a very different 
thing from free goods, because the laws of property, as for 
instance those regarding theft, apply quite as stringently to 
public as to private property, 'sometimes even more so. The 
sharpness of the law of public property in the post office is 
well known. 



14 ELEMENTARY PRINCIPLES OF ECONOMICS 

It is one of the defects of current discussions of property 
that the concept of public property has been treated in- 
adequately by economists and publicists generally, with 
the result that false and one-sided conclusions have been 
drawn. Distribution depends on public as well as on pri- 
vate property, and the interrelations of these two are vital 
in any given distribution of wealth. 

But it must be borne in mind that, strictly speaking, 
property refers to rights only. Property is an exclusive 
right. Speaking accurately, then, property is not a thing, 
but the rights which extend over a thing. A less strict use 
of the word property makes property include the things over 
which the right extends. We say of a farm, "This is my 
property," meaning the land and improvements on it and 
not merely the rights in them. But, strictly speaking, 
property is the right, and not the object over which the right 
extends. 

II. Guaranteed Privileges 

Closely connected with the general subject of property 
is the legal arrangement whereby exclusive privileges are 
awarded in return for services to society. Such privileges 
really become a special form of private property. Their 
particular importance is in determining the distribution of 
wealth, but they are not without importance also in the 
production of wealth, on account of the stimulus which the 
hope of such privileges may give to invention and improve- 
ment. 

Chief among guaranteed privileges are patents and copy- 
rights. Society, in all modern nations, grants patents to 
inventors of mechanical devices and copyrights to authors of 
literary or other artistic productions. Copyright is extended 



FUNDAMENTAL INSTITUTIONS 15 

not dnly to books, pamphlets, and the like, but also to marks 
or names designed to distinguish certain products in the 
market. Such copyrighted trademarks have been of great 
economic importance in recent years. 

Most modern states proceed on the assumption that the 
public interest will be furthered by granting these exclusive 
privileges, and it is generally agreed that the policy has 
been justified by its results. Yet experience has shown 
that neither patents nor copyrights should be given without 
limitations. Patents should not be given on light and 
trivial grounds, nor for unlimited or overlong periods. More- 
over, owners of patents should be made by law either to use 
them or to allow them to lapse, and to grant to others the 
right to use them on payment of a reasonable royalty. 
Similarly, copyrights are carefully guarded in the interests 
of the public. The law in a general way aims to give the 
reward of services to the author, and avoids allowing a 
reward for services which others have performed. 

III. Contracts 

Another fundamental institution in our present industrial 
society is contract. Contract, while logically a separate 
right from that of property, naturally flows from it, and is 
usually regarded as in reality an incident of property or one 
of the bundle of rights of which property in general consists. 
Thus property, in the absence of limitation, is assumed to 
include the right to contract for the use or sale of the thing 
owned. Some sort of contract lies at the basis of all asso- 
ciated action. That this condition of associated activity 
should be maintained by the state can hardly be doubted, 
yet even the right to contract has its limitations resting 
upon human well-being. To-day legislation provides (1) 



16 ELEMENTARY PRINCIPLES OF ECONOMICS 

who may and who may not contract, (2) for what purposes 
valid contracts may be made, and (3) under what forms and 
conditions they must be made to be vaUd. Experience 
justifies this regulation. Children, for example, cannot as 
a rule make contracts that will bind themselves, because 
they are not presumed by the law to have the requisite 
knowledge and judgment. Again, agreements which are 
clearly opposed to public policy, such as an agreement entered 
into for the commission of a crime, are invalid and would 
not be enforced by the courts. 

IV. The Right to Establish Private Enterprises 

The right to establish private enterprises is another 
fundamental one which is nevertheless changing and change- 
able. It is only within the last century that the right has 
come to have its present wide scope, especially in the case 
of corporations. Many restrictions indeed exist, as in the 
case of the liquor traiSBc ; while in the field of the so-called 
public utilities, — railways, lighting works, etc., — restric- 
tions have so increased recently that it is generally necessary 
to secure special authorization to establish a new enterprise. 
It is still open to serious question, however, whether society 
has not gone too far in our own country in the direction of 
granting freedom to establish private business. 

V. Personal Liberty 

Personal liberty or freedom, including (1) the right to move 
from place to place at pleasure, and (2) the right of acquisition, 
— that is, the right to acquire property, — is an institution 
which we are perhaps most likely to regard as necessary 
and natural under all circumstances. Yet here again we 



FUNDAMENTAL INSTITUTIONS 17 

have the case of a right which has been very slowly acquired 
by society. Moreover, it never has been, is not to-day, 
and probably never can be, an unlimited right. It is the 
endeavor of society to equalize human liberty, not to make 
such liberty absolute, for that would be impossible. The 
question, then, is not whether w^e shall limit liberty, but how 
we can so limit it that we may secure a maximum of liberty 
for all. 

The Basis of Human Rights. — What, then, is the basis of 
human rights ? The preceding discussion should have made 
it clear that rights do not come from nature in the sense that 
they thus gain a standing and authority independent of 
the will or consent of society. Neither are such rights 
absolute or inherent, though these words have often been 
mistakenly used in describing them. Private property, 
contract, personal liberty, and all the other " rights of man " 
must justify themselves by proving that they promote the 
highest welfare of mankind. As the Latin phrase has it, 
" Solus publica swprema lex." Some of us may believe that 
it is in the " very nature of things " that personal liberty, 
for example, will best serve human welfare, but we cannot ask 
or expect others to take this for granted on our unsupported 
assertion. And when we admit that we must prove the 
social beneficence of private property or personal liberty, 
we have already practically abandoned the " natural rights " 
argument in the dogmatic form already described. Practi- 
cally speaking, therefore, we may all agree that the basis of 
human rights is social expediency, — the proved power to 
promote the well-being of men in society. 

The student must think this out fairly and deliberately. 
Only when he has substituted for bare dogmatism the rule 
of human welfare will he be prepared to study economic 
questions rationally and scientifically. 



18 ELEMENTARY PRINCIPLES OF ECONOMICS 

For the maintenance of these fundamental conditions of 
the existing social order which we have described, we are 
dependent upon the political organization of society, which 
we know as the state. No other instrument of society is 
adequate to the task. The maintenance of these foundations, 
if they are to be maintained at all, can be accomplished in 
no other way. When the state attempts this and little more, 
its policy is said to be passive. The French phrase, " laissez- 
faire," meaning " let alone " or " hands off ", is most fre- 
quently used to characterize this purely passive policy. 
When the state goes far beyond this in endeavors to promote 
the general welfare, its policy is said to be active. 

Conclusion. — Let us remember, then, that the most 
fundamental institutions are not unchangeable, but that we 
can discover their beginnings in history, and can trace their 
development through manifold and unceasing changes to 
their present form. Let us remember, too, that as change 
has marked the past, so it must mark the future ; and that 
the institutions which we have described, fundamental as 
they are, derive their rational justification from their power 
to promote human well-being. Bearing these facts in mind, 
we may free ourselves from two errors, each an extreme one, 
from which many false views of our future take their rise. 
On the one hand, we may hope to escape the pessimism that 
springs from looking at the existing order of things as un- 
alterably determined ; and, on the other hand, we may escape 
that unreasoning and unreasonable optimism which belittles 
the importance of our fundamental rights and institutions, 
and which inconsiderately hopes to change these, in the 
twinlding of an eye, by the simple expedient of a royal edict 
or a majority vote of a sovereign people. 



FUNDAMENTAL INSTITUTIONS 19 



SUMMARY 

There are certain ideas and institutions in our social order which 
are so fundamental that we come to regard them as "nat- 
ural" and necessary. 

Among these fundamentals are property, — pubhc and private, 
— guaranteed privileges, contract, .the right to estabhsh busi- 
ness enterprises, and personal freedom. 

Far from being absolute or natural and necessary to every state 
of society, these rights have always been limited, have always 
been changing, and have their origin and justification in 
social expediency. 

History warns us neither to overestimate nor to underestimate 
the importance of these institutions. They may be changed, 
but they cannot be changed easily or quickly. 

QUESTIONS FOR RECITATION 

What is private property? Why is it often held to be a right 

that is not open to question or discussion? 
What is the basis of human rights? Are any of them exempt 

from the need of examination or justification? 
What is the historical origin of private property? 
What Umitations does the state set to private property? Is 

the present tendency toward an increase or a decrease of 

these hmitations? 
Ought private property to be retained ? If so, why and how far ? 
What is a trade-mark? A copyright? A patent? Discuss 

their purpose and results. 
What limitations are properly set to the right of personal free- 
dom? Of what does the right to personal freedom consist? 
From what two extreme errors ought a true idea of fundamental 

institutions to guard us? 

QUESTIONS FOR STUDY AND DISCUSSION 

Has a murderer a "right to Hve"? If so, is it a " natural right " ? 

Is it the argument of natural right or of social expediency that 
has led many societies to give up the death penalty ? 

On what basis would you argue against slavery in the United 
States to-day? 

A corporation exists only by virtue of a charter granted by 
society. Has a corporation a natural right to hold prop- 
erty? to make contracts? 



20 ELEMENTARY PRINCIPLES OF ECONOMICS 

5. If human rights were natural, could they logically be limited? 

Could their just Umits be discovered from nature? 

6. Does the Une between public property and private property 

change according to any general principle or law? 

LITERATURE 

Ely, R. T. : Property and Contract, especially Bk. I, Pt. I, Chs. 1-3. 
Mill, John Stuart : Principles of Political Economy, Bk. II, Ch. 1, 

§ 2, and Ch. 2, §§ 1, 5, 6, and 7. 
Report of the United States Commissioner of Patents for 1888. 

(See also others of the Patent Commissioners' Annual 

Reports.) 
Ritchie, D. J. : Natural Rights. 



BOOK II 

A BRIEF SKETCH OF ECONOMIC HISTORY 

CHAPTER I 
INTRODUCTORY 

What Economic History is. — In beginning the study of 
economic history it will be well for us to recall what has been 
said in a preceding chapter as to the nature of the subject 
which is before us. The history of literature, the history of 
government, the history of religion, and other histories 
which the student can readily call to mind, have one thing in 
common : they are all of them histories of man. Each of 
them treats of man in one particular line of his activities. 
It is the same with economic history. Its subject is man, 
but it deals primarily, not with his government or his wor- 
ship, but with his efforts to get a living. Many who have 
held a narrow view of our subject have objected sneeringly 
that it is but a " bread and butter " science. Even if this 
were a just view of the subject, economics would still be 
worthy of, our most careful study. But, as a matter of fact, 
it means much more than bread and butter. It is plain on a 
moment's reflection that every kind of activity, however 
sublime, depends to some extent upon material things. And 
so this subject of ours — man in his effort to acquire and 
to use material things, to satisfy his wants, or, in other 

21 



22 ELEMENTARY PRINCIPLES OF ECONOMICS 

words, to get a living — is of interest to everybody, and is 
closely connected with every kind of human effort. 

General Survey. — At the beginning of our review of 
the history of man's economic efforts we are struck by the 
fact that all the manifold ways of getting things may after 
all be reduced to two : man must either find or make. Of 
course the two ways often combine in varying proportions, 
and in our own experience the two are constantly shading 
into each other ; but for purposes of present clearness we may 
well make the distinction. Now, uncivilized man finds the 
things he uses ; civilized man adds to finding the art of making. 
Indeed, ciiyilization, on its material side, consists largely in want- 
ing many things and in learning how to make and to use them. 

The economic activity of man before the dawn of recorded 
history is enshrouded in so much of mystery that we can do 
little more than conjecture regarding it. We have evidence 
to show that prehistoric man obtained his material goods, 
as the beasts do, simply by taking possession of natural 
products, exercising little or no control over nature, and 
protecting himself from the elements only by caves or by the 
simplest of contrivances. 

Historical Stages. — The period of civilization just men- 
tioned is something so remote, something about which our 
knowledge is so uncertain and fragmentary, that we are 
scarcely able to treat it as a separate stage in economic 
evolution at alL We may, therefore, pass directly to a study 
of the regular stages, as they have commonly been described 
and distinguished, beginning with the time when men had 
learned to kindle fires, to eat meat, and to live in some kind of 
political communities, however imperfect. Starting thus, we 
may conveniently divide the course of man's economic 
development — regarding it from the point of view of his 
means of procuring goods — into five stages, as follows : — 



INTRODUCTORY 23 

(1) The hunting and fishing stage. ♦ 

(2) The pastoral or nomadic stage. ^ 

(3) The agricultural stage. ' 

(4) The handicraft, or trades and commerce stage. - 

(5) The industrial stage. 

From the point of view of the changing size of the domi- 
nating economic unit, man's history falls into these four 
stages : — 

(1) The stage of independent economy. 

(2) The stage of town or local economy. 

(3) The stage of national economy. 

(4) The stage of imperial or even world economy. 

Again, looking at the same development from the point 
of view of man's ways of exchanging goods, we may simi- 
larly distinguish the four following stages : — 

(1) The stage of mutual giving of gifts. 

(2) The stage of " truck " or barter economy. 

(3) The stage of money economy. 

(4) The stage of credit economy. 

Still again, if we view economic evolution from the point 
of view of labor, we have the six following stages : — 

(1) Slaughter of enemies taken in battle, — no steady, 
regular labor. 

(2) Slavery. 

(3) Serfdom. 

(4) " Free " labor, governed largely by custom in the 
making of contracts. 

(5) " Free " labor, with individual contract. 



24 ELEMENTARY PRINCIPLES OF ECONOMICS 

(6) " Free " labor, with collective bargaining and group 
contract regulated increasingly by statute. 

These classifications may now be brought together in a 
single table, in which the historical relation of the various 
classifications is roughly indicated by the position of the 
stages in the parallel columns. 



Economic Stages 



From the Point of 
View of Produc- 
tion. 

1. Hunting and 
Fishing 



2. Pastoral or 
Nomadic 

3. Agricultural 



4. Handicraft 
or Trades and 
Commerce 



5. Industrial 



From the Point of 
View of the Size 
of the Economy. 



From the Point of 
View of Exchange. 



From the Point of 
View of Labor. 



1. Independent 
Economy 



2. Town or 
Local Econ- 
omy 



3. National 
Economy 

4. Imperial or 
World Econ- 
omy 



1. Mutual 
Gifts 

2. Barter or 
"Truck" 



3. Money 



4. Credit 



1. Slaughter of 
Enemies in 
War 



2. Slavery 



3. Serfdom 



4. "Free" labor, 
customary 
contract 

5. "Free "labor, 
individual 
contract 

6. "Free "labor, 
group con- 
tract 



It must not be understood that these stages are in any of 
the classifications distinctly or sharply separated, that we 
can fix definite dates at which men consciously abandoned 
one way of obtaining goods, or of exchanging them, and 
passed to another method. The transition from one stage 
to another is slow and almost imperceptible. Those students 



INTRODUCTORY 25 

of this took who have studied botany or zoology will under- 
stand the illustration when we say that the stages shade into 
one another as do the varieties of closely related genera in 
the case of living organisms. Moreover, it must not be 
understood that all of the features of an earlier stage pass 
away when men enter into the newer way. In many cases 
all the features of the old survive and even have an increased 
importance in the later stage. Thus trades and commerce 
are to-day pursued on a far larger scale than they were in 
the handicraft stage itself; but since then new and im- 
portant features of economic life have developed to give a 
new character to the age, and we seek to indicate this change 
by some distinctive title. To-day, in the United States, 
we can find illustrations of nearly all the stages of evolution 
that have been mentioned. Barter, or truck, is still the 
commonest mode of exchange in some parts of the country, 
and, indeed, there are comparatively few places in which 
credit transactions have in the main taken the place of 
money transactions. It is interesting to observe that, owing 
to the progressive western movement of the population of 
the country, the stages in the history of man's productive 
efforts appear in regular order from west to east. Thus 
certain parts of the western country are still largely occupied 
by hunters and trappers ; next are great stretches of country 
almost entirely devoted to grazing ; farther east, agriculture 
predominates ; trades and commerce are active especially in 
the country east of the Mississippi and in the extreme west ; 
manufacture on a large scale is found especially in the North 
Atlantic and North Central groups of States ; while, finally, 
the great industrial combinations that mark the latest step 
in development are mainly confined, at least as far as their 
legal residence is concerned, to the Atlantic seaboard. It is 
perhaps excess of caution to remind the reader that the 



26 ELEMENTARY PRINCIPLES OF ECONOMICS 

American trapper, cattle man, farmer, and handicraftsman 
all find their life greatly modified by their easy and cheap 
intercourse with one another and by their access to the results 
of man's latest industrial achievements in other parts of 
the world. But on the other hand it is interesting to note 
that certain features of their life are reminiscent of the 
earlier unmodified stages. 

Our study of the history of man's economic development 
may conveniently take the form of a study of the various 
stages which have been mentioned, and more especially of 
the stages in the history of man's productive efforts. 

SUMMARY 

1. Economic history is the history of man in his efforts to get a 

living ; that is, to get the things needed for all his activities 
of body and mind. 

2. Uncivilized man finds things ; civilized man makes them. 

3. The history of man from the point of view of his productive 

efforts may be divided into five stages : the hunting and 
fishing stage, the pastoral or nomadic, the agricultural, 
the handicraft or trades and commerce, and the industrial. 

4. Other subsidiary classifications are based upon the history of 

the development of the size of the economic unit, the his- 
tory of exchange, and the history of labor. 

QUESTIONS FOR RECITATION 

1 . What is included in the term ' ' living ' ' ? Mention some economic 

elements in religious work. In education. In politics. 

2. What two fundamental ways are there of getting things? In 

which way can society get more ? 

3. What -do we know of the economic life of prehistoric man? 

4. What are the five stages of economic progress from the point 

of view of production? The four stages from the point 
of view of transfers? The six stages from the point of 
view of labor? The four stages from the point of view 
of the size of the economic unit? 

5. What can you say of the distinctness of separation of these 

stages ? 



INTRODUCTORY 27 



QUESTIONS FOR STUDY AND DISCUSSION 

1. What do you think is the signifieanee of the history of man's 

modes of getting a living as compared with the history of 
his forms of government? 

2. Which do you think has had the greater influence upon the 

other ? 

3. Can you imagine an economic setting in which the American 

people could not have been brought to beheve that human 
slavery was wrong ? 

4. Did economic forces play any part in deciding the fundamental 

issue in the Civil War? 

5. What is the meaning of the phrase "the economic interpretation 

of history"? 

LITERATURE 

Biicher, Carl : Industrial Evolution (translated from the German), 

especially Chs. I and II. 
Ely, R. T. : Studies in the Evolution of Industrial Society, Pt. I, 

Ch. III. 
Lubbock, Sir John : Prehistoric Times, especially the last chapter ; 

also Origin of Civilization and Primitive Condition of Man. 
Morgan, L. H. : Ancient Society, Pt. I, Chs. II and III. 
SchmoUer, Gustav : The Mercantile System, in Ashley's Economic 

Classics, pp. 1-5. 
Semple, E.G.: Influence of Geographic Environment, Ch. I. 
Stanley, H. M. : In Darkest Africa, Vol. I, Ch. VIII ; Vol. II, 

Chs. XXIII and XXXIII. 



CHAPTER II 
EARLY STAGES OF INDUSTRIAL DEVELOPMENT 

I. The Hunting and Fishing Stage 

General Characterization. — In the first stage of man's 
economic development, nature is the great factor in produc- 
tion. There is Httle labor and less capital. Labor, as we 
know it to-day, is beneath the dignity of the savage, and 
was therefore assigned largely to the women. Man contents 
himself with what nature gives him, his labor taking the 
form of appropriating these gifts. He has not progressed 
far in subjecting animals to his will ; still less does he attempt 
to improve useful animals by breeding. Transforming 
natural products by his handicraft is but an insignificant 
part of his activity. Not even does he store up goods in 
time of abundance against a future time of dearth. The 
American Indian, where he has not been elevated by contact 
with a higher civilization, is a good illustration of this stage 
of economic progress. 

Economic activity in this stage is in a high degree isolated. 
Hence the hunting and fishing stage, together with the two 
succeedifig stages, is said to belong to the period of independ- 
ent economy. In other words, the work of getting goods is 
not carried on, as with us, by great groups of men, in many 
countries, who exchange their products, but is done mainly 
in the single family, each family producing all or nearly all 
of the things which its members consume. For this reason, 

28 



EARLY STAGES OF INDUSTRIAL DEVELOPMENT 29 

too, there is little exchange or transfer of goods, though there 
is no unwillingness to make exchanges if opportunity offers 
to secure by exchange something new and attractive. 

There being little exchange of products or division of 
labor, it follows that there are no economic classes and no 
industrial conflicts. The greater part of property, including 
all land, is the common possession of the social group, private 
property being confined to arms of war, household goods, 
and the immediate rewards of labor. 

Hunting Tribes. — Although we have grouped the hunting 
and fishing tribes together as being upon the same plane 
of economic evolution, we can find certain clear differences 
between those who live primarily on the products of the 
chase and those who get their living mainly by fishing. 
Among hunting tribes we find the work and life leading to 
a high development of such qualities as cunning, endurance, 
and bodily strength, but not to a development of technical 
skill nor to reflection upon the processes of nature. Their 
condition of life prevents the possibility of any but a sparse 
population. It has been estimated that in this stage each 
hunter requires for his support more than fifty thousand 
acres, or seventy-eight square miles, an area which in the 
state of Rhode Island at present supports on an average 
more than forty thousand people. The great world city of 
London has a population almost three million times as dense. 
It follows from this need of large territories that war becomes 
an economic necessity whenever there is not an abundance 
of unoccupied land. This same condition of things gives us 
one of the causes of cannibalism. The pressure of increasing 
numbers bringing the people continually to the verge of 
starvation, they fall little by little into the custom of eating 
enemies taken in war. 

Fishing Tribes. — As might be expected, primitive tribes 



30 ELEMENTARY PRINCIPLES OF ECONOMICS 

of fishing people are more peaceable than are the hunting 
tribes. Their population is denser, both because of their 
more peaceable disposition and because of the fact that a 
smaller area is sufiicient for the support of a given number 
of people engaged as they are. Having less need of frequent 
migrations to seek new food resources, they naturally form 
larger accumulations of capital. They build dwellings of a 
more permanent character, and construct boats and fishing 
implements. On the whole, we may say that the power of 
man over nature is greater among fishing than among hunting 
tribes. Primitive fishing tribes can now be found only in 
the frigid zone. 

II. The Pastoral Stage 

General Characterization. — Between uncivilized man, 
who uses what he finds, and civilized man, who makes what 
he wants, there is a middle ground. The man of this middle 
period neither depends alone on what he can find, nor makes 
things to any great extent, as we commonly think of making 
things ; but rather raises things ; in other words, he has 
learned to a limited extent to give direction to the forces of 
nature. He has learned to produce, but he still lives chiefly 
on the raw materials he has coaxed from nature, not knowing 
how to make them up. He is learning to labor and to save. 
To be sure, he very early learns the art of making a few simple 
tools like bows and arrows and primitive stone implements ; 
but with these few exceptions, it is worthy of note that as 
man learns to subdue nature he begins not with dead nature, 
— not with inanimate things, — but with living or animate 
nature; he uses, not metals, but animals and plants, and 
learns to increase their amount by artifice. Moreover, of 
these two classes of living things, he first subdues the higher 



EARLY STAGES OF INDUSTRIAL DEVELOPMENT 31 

form of life, — that which more nearly resembles his own, — 
and, as a general rule, not until long afterward does he learn 
to exercise any considerable control over plant life for his 
uses. 

Changes that mark the Stage. — When hunting tribes cease 
to depend for food solely upon the killing or capture of animals, 
and acquire the art of taming and breeding them, such tribes 
are entering upon the second great era of economic progress, 
which we have called the pastoral stage. Even in the hunt- 
ing stage there lay the beginnings of such progress, in the 
taming of dogs and horses for hunting ; but when extensive 
pasturing of animals for food and clothing takes place, the 
pastoral stage has well begun. Marked features of the earlier 
stage still continue, however. Thus, while man now lives 
chiefly upon his flocks, he still leaves the flocks to live upon 
what they can find. So, while man no longer needs to wander 
in search of his own food, he must nevertheless do so for the 
food of his flocks. Cities are therefore still impossible. 
Moreover, though the land will now support many more in- 
habitants than before, much land is still needed for the neces- 
sary pasture, and tribes and families roaming broadly in 
search of desirable situations frequently come into sharp 
collision. According to the calculations of the celebrated 
geographer. Professor Ratzel, nomadic populations require, 
on an average, about a square mile for every two to five 
persons. Wars, therefore, continue, keeping down popula- 
tion, but with one important change : the victims of war 
for a long time continue to be generally slaughtered, the 
women and children being more frequently spared than the 
men ; but men who have flocks to furnish them food cease 
at length to eat human flesh. Captives later come to be 
recognized as of use in serving their captors, and thus slav- 
ery succeeds cannibalism and slaughter. Slavery could not 



32 ELEMENTARY PRINCIPLES OF ECONOMICS 

have become extensive in the earHer stage, because slaves 
without weapons would have been of little use when women 
did nearly all the drudgery, and, on the other hand, slaves 
with weapons would have been a constant menace to their 
masters. 

Migrations. — Wanderings of whole peoples were very 
common, due in some cases to the exhaustion of old feeding- 
grounds, and in other cases to the natural increase in num- 
bers when a tribe had been long established in one place. It 
was such overpopulation that brought about the warlike 
incursions of barbarian hosts into Europe from the heart of 
Asia, and the wanderings of the nations in the early centuries 
of the Christian era. 

Little Land Ownership. — It follows from what we have 
already said that there was little ownership of land in the 
sense in which we now regard ownership. Tribes as a whole 
would lay claim to certain districts for a time, and would 
try to keep other tribes from pasturing there. But indi- 
viduals of the tribe would own no land, or at most very 
little. The notion of land ownership develops only when the 
land itself becomes more useful, and when the fruits of its 
fertility can be more directly appropriated than could happen 
when land was used for pasturing. 

Private Property. — Yet private property in other things 
than land had now become not uncommon. Even consider- 
able accumulations of wealth took place, consisting of flocks, 
gold, silver, finely woven fabrics, and precious stones, — in 
short, such things as very early appeal to the barbarian taste 
for showy ornament and can be transported from place to 
place with relative ease. We also find, even at this early 
time, great differences in the wealth of individuals, the rich 
and the poor being sharply contrasted. 

Little Commerce. — In spite of the growth of wealth among 



EARLY STAGES OF INDUSTRIAL DEVELOPMENT 33 

men, there was little exchange or commerce. The reason 
for this is not far to seek. In order to have commerce, not 
only must there be wealth, but the wealth must be diversified. 
There is little to be gained by exchanging ox for ox. Of 
course, in the other classes of goods to which we have referred 
there was some little traffic, but trade in the modern sense 
of the v/ord can hardly be said to have existed. The economy 
of each large family or household was in the main sufficient 
unto itself. 

The Origin of Exchange. — Such trade as did obtain was 
carried on by barter, or by the still earlier form of exchanging 
gifts. It is an interesting fact that barter, the earliest 
form of regular exchange, grew originally out of the practice 
of making presents. iVmong many primitive peoples to-day, 
barter is not recognized as an institution, but when one person 
presents a gift to another, he waits expectantly for a gift 
in return, and when he receives it, scans it closely to make sure 
that he has got an equivalent for his generosity. 

Ill, The Agkicultukal Stage 

General Characterization. — Man's next accomplishment, 
which carries him a distinct stage farther in his development, 
is of immense importance. Already knowing how to manage 
animals to advantage, he now learns to " manage " plants, 
and to raise them at will. Agriculture, as a means of sup- 
port, is thus added to the keeping of flocks and to the chase. 
A greater variety of food is in this way made possible for 
man, who now ceases his wandering life. A much denser 
population is the result. Professor Ratzel's calculations 
indicate that the early agricultural populations were about 
six times as dense as the pastoral populations. With a 
denser population remaining permanently in fixed abodes, 



34 ELEMENTARY PRINCIPLES OF ECONOMICS 

new relations spring up among men, new duties, new arts, 
and new possibilities of civilization. It is in these conditions 
that the political whole which we know as a nation has its 
beginning. 

Land Ownership. — With growing density of population 
and increasing permanency of settlement goes a third result, 
— the private ownership of land. Successful cultivation of 
the soil requires detailed personal care and attention, and 
some sort of division of the land was hence seen to be neces- 
sary. 

The Origin of a Laboring Class. — Perhaps the most im- 
portant result of the change which produced the agricultural 
stage was the growth of slavery as an institution. As we 
have said, slavery had its beginni ag3 in the preceding period, 
but it is only in the agricultural stage that it becomes an 
important, almost a fundamental, economic institution. 
Tending the herds did not call for persistent labor, but the 
process of tilling the soil is undisguised work, and primitive 
men were not fond of work, nor had they been trained by long 
usage to submit to it as to an unpleasant habit. It is not 
strange, then, that they should have spared the lives of men 
conquered in battle with the design of putting upon them the 
task of tilling the soil. This seems to us perhaps a poor 
reason for being humane, but where humanity is the result, 
a poor reason is better than none. Free labor has become 
possible only because for century after century certain men 
labored not from choice but from necessity. As they became 
free, labor became free, and the habit of labor has become 
fixed in the race. 

Commerce. — With every increase of wealth the tendency 
to trade also increases, but as yet the occasion for trade was 
slight, since men's wants and wealth were still everywhere 
much the same. Such trade as existed ministered chiefly 



EARLY STAGES OF INDUSTRIAL DEVELOPMENT 35 

to the love of luxury, and this long continued to be the case. 
It was probably in part from this cause that the ancient 
philosophers and the early fathers of the Christian Church 
displayed great hostility to commerce. 

Laws and Customs reflecting Ideas. — There remains to 
be noted the change and enlargement in men's ideas, as re- 
flected in their laws and customs. The Mosaic code, 
framed to govern a people in the pastoral and agricultural 
stages, furnishes perhaps the best source of information on 
these new ideas. Even before this time there had been 
numerous customs regulating life, but in the Mosaic code 
we are struck by the great increase of duties and restrictions 
which were 'then recognized. With fixed residence had 
arisen the state, with its justice, its guidance, and its pro- 
tection, — its many thou sJialts and thou shalt nots; and all 
this because men had now come to be permanent neighbors, 
and therefore had the utmost need of a definite understand- 
ing to keep them from trespassing voluntarily and invol- 
untarily on one another's liberty. If men are to live close 
together and accumulate property and enjoy it in peace, 
there must always be general agreement among the many, 
and vigorous compulsion for the few. 

" Neighbor " and " Stranger." — ^ It is worthy of notice, 
however, that for a long time duties and laws were chiefly 
recognized as being applicable only at home. Beyond the 
boundaries of the tribe or nation they were scarcely held to be 
binding at all. Thus, for instance, in the early Germanic 
communities, when the scattered tribes were still small and 
separated. by unoccupied land, the members of each tribe 
lived in relations of brotherhood, holding property in com- 
mon and closely guarding all mutual rights. But when 
different tribes came together to trade on the neutral ground 
separating their settlements, all kinds of sharp practice w^ere 



36 ELEMENTARY PRINCIPLES OF ECONOMICS 

deemed admissible. Things not to be thought of at home 
here passed unquestioned. 

Duration of the Agricultural Stage. — The agricultural 
stage lasted for centuries among many peoples. In the 
development of the civilization of Western Europe, it did not 
evolve into a higher form until the great movement toward 
the building of cities began. Of course it has not been wholly 
displaced by subsequent stages of economic life, but only 
modified — unceasingly modifi.ed — with the lapse of time. 
The marks of the earlier stage are clearly discernible even 
in our industrial life in America. 

IV. The Hajstdiceaft Stage 

General Characterization. — We have said on an earlier 
page that real material civilization begins with making 
things ; it is with the stages in which men make things that 
we have now to deal. Speaking very generally, we may say 
that men make things in either of two ways : by the hands 
directly, sometimes assisted by simple tools; or by the hands 
indirectly, through the mediation of machinery, generally 
propelled by other than man's power. As was natural, man 
in his progress came first to make things with his hands 
directly, learning later to quicken and improve his work by 
the use of machinery and the employment of power produced 
by animals, or running water, or wind, or steam, or elec- 
tricity, or gas explosion. The very word " manufacture," 
which we use to represent the idea of making things, meant, 
until the nineteenth century, making things by hand, as the 
Latin words from which it is formed indicate. As the word 
has since had an extension of meaning, we may say that 
there are two kinds of manufacture : (1) hand manufacture, 
and (2) power manufacture. Hand manufacture is the 
foundation of the fourth stage. 



EARLY STAGES OF INDUSTRIAL DEVELOPMENT 37 

It goes without saying that labor and capital — the fruit 
of past labor used for increasing the product of the labor of 
the day ■ — now become more important than ever before. 
Man by his skill transforms raw materials : he learns to 
weave fabrics and to fashion things in wood and metal ; to 
use inanimate, as well as animate, nature. The chief 
results of this will be more clearly seen as we discuss them 
under separate headings. 

1. Trades. — Skill in doing comes from repeated doing. 
" The Jack of all trades is master of none." With the coming 
of handicrafts, therefore, self-interest leads men to specialize 
so far as the needs and circumstances of the time will permit 
them to act thus with profit. Hence, in this stage, we find 
division of occupations, whereby some men become black- 
smiths, some shoemakers, some weavers, etc. Many sur- 
names, such as Smith, Baker, Joyner, Taylor, point back to 
a time when such specialization was more noticed than at 
present. 

2. Commerce. — We have more than once mentioned the 
fact that there can be little commerce so long as men are 
generally engaged in the same kind of business. But when 
communities become larger; when their wants grow more 
various and their goods consequently increase in quantity 
and diversity ; when, finally, it becomes possible for men to 
specialize in their occupations, commerce becomes wide- 
spread and important. When each man has his trade and 
makes articles of only one kind, he will neither want all the 
things that he makes, nor make all the things that he wants. 
He must naake exchanges. And so, whenever manufacture 
develops, we find trade growing up as a necessity. We 
cannot say that manufacture results in commerce, nor that 
commerce results in manufacture. We must rather look 
upon the two as mutually causing each other, their joint 



38 ELEMENTARY PRINCIPLES OF ECONOMICS 

cause lying in the growing culture and wants of mankind. 
This stage, on account of the appearance of commerce, is fre- 
quently designated as the trades and commerce stage, but it 
may also be designated more simply as the handicraft stage, 
inasmuch as it is dominated by handicrafts, while commerce 
has in this stage far less significance than in modern times. 

With the growth of commerce, some men find it profitable 
to spend all their time in exchanging the goods that other 
men make, earning their compensation by saving the makers 
the greater time and trouble which direct exchanges would 
necessarily involve. , Moreover, different countries also find 
an advantage in exchanging their respective products, and 
here again men of special training are needed to carry on the 
work of exchange. Such commerce as grows up during this 
stage between different countries or communities is much 
handicapped by the inadequate means of communication; 
but where goods can be carried by water, commerce, even in 
bulky commodities, takes on considerable proportions. 

3. Money. — Of course, for such a general system of ex- 
change, barter was entirely inadequate. Among primitive 
peoples barter is the only mode of effecting exchanges, and 
travelers among savage tribes tell amusing stories of the 
difficulties experienced in securing goods by such a system. 
We cannot here enter into a full discussion of the limitations 
of barter, but we may speak of one of the chief requisites 
for any exchange by barter, — the need of what one writer 
has called reciprocity of desire. By this expression it is 
meant that before an exchange can take place by barter, 
the man who has a superfluity of one good and wants another 
must find a second person whose superfluity and want are 
reciprocal to his own. The rarity of such coincidence is it- 
self sufficient to prevent barter from serving as an efficient 
method of exchange. In the course of time, as men bartered 



EARLY STAGES OF INDUSTRIAL DEVELOPMENT 39 

with one another, it was found that certain things were more 
generally acceptable than others, and that some one thing 
or some few things were most generally acceptable. These 
generally acceptable goods have varied in different stages of 
economic development and in different places. Among 
primitive peoples, articles of adornment have usually held 
such a place. As people grew to learn that such articles 
were generally acceptable, they would themselves in turn re- 
ceive them more and more readily in their exchanges, and the 
frequency of use would in turn increase the recognized utility 
of possessing them. Without going further with our ex- 
planation, we ma}^ say that, spontaneously and in large part 
by unconscious processes, there has always grown up among 
every people some one generally accepted and recognized medium 
of exchange or some feio things that have been so recognized. 
As this medium greiv in acceptability and cognizability, it 
took on more and more the character of what we know as money. 
It was during the handicraft or trades and commerce stage 
that gold and silver, already much used for this purpose, 
came to have that universal recognition for their desirability 
in exchanges that made them money. 

4. Cities. — Among those employed in agricultural pur- 
suits, there is a tendency to form village communities, but 
in the agricultural stage such communities cannot become 
populous, because agriculture requires a scattered popula- 
tion. Manufacture, on the other hand, has an opposite 
tendency. If men are to live by their trades and by ex- 
changing with one another, it is important that they be 
near one another. Thus cities, situated conveniently for 
commerce on the coast or on great rivers, develop whenever 
men learn to manufacture. 

5. The Gild System. — New forces coming into society do 
not take care of themselves. So the trades had to organize 



40 ELEMENTARY PRINCIPLES OF ECONOMICS 

in order to reduce their business to some kind of order. Each 
trade had its gild, which specified in detail how the business 
should be carried on, how many should be admitted to it, 
and how the trade should be learned. Where, as was usual, 
the gilds controlled the government of the cities, these rules 
were also sanctioned by law. 

6. Political Freedom. — Throughout most of Europe the 
agricultural stage culminated in the feudal system. Under 
that system the feudal lord occupied a commanding position, 
very like that held by a patriarch in an earlier pastoral 
state, and owned the land occupied by the tribe or people. 
The tillers of the soil had become serfs, who, though they 
could not be sold away from the land, were obliged to stay 
on the lord's domain and work for him for such reward as 
he chose to give them, or such as custom and public opinion, 
powerfully backed up by the Church, had established. 
Slavery thus gave way to serfdom. The trading cities some- 
times became opponents of the great feudal estates. The 
lords, feeling their power threatened, sometimes opposed 
the cities. And so there were quarrels and agreements in 
places. Finally the cities conquered and won charters for 
themselves. These cities were then free cities, and serfs 
who fled to them were accepted and made free. Thus 
feudalism began to break down in the towns at least, and 
with the disappearance of slavery and serfdom, man's prog- 
ress in the art of getting a living resulted in another great 
step toward liberty and humanity. 

SUMMARY 

1. Uncivilized or savage man gets his living by finding things, 

i.e. by hunting or fishing, or by both. 

2. Economic activity in the earliest stage is largely isolated. 

3. Hunting tribes differ in character from fishing tribes, owing 

to the difference in the conditions of their life. 



EARLY STAGES OF INDUSTRIAL DEVELOPMENT 41 

4. The domestication of animals, leading to the pastoral stage, 

assures subsistence, introduces slavery, and increases wealth. 

5. The pastoral stage, in which men get their living by "raising" 

or "managing" animals, has little landownership or com- 
merce, and is marked by frequent tribal migrations. 

6. In the agricultural stage, man adds the "management" of plant 

life to his earUer management of animal life, thus making 
his existence more secure and population more dense. 

7. Cultivation of the soU fixes residence, extends law and custom, 

and develops tribal ownership of land and a distinct laboring 
class. 

8. Economic civilization, which begins with the making of things, 

appears in the handicraft stage, called also the trades and 
commerce stage. 

9. In the handicraft stage, money is regularly used, trades are 

developed and organized in gilds, and cities, rising from the 
new commerce, become free and break down the feudal 
system. 

QUESTIONS FOR RECITATION 

1. What is the economic mark of savagery? How do hunting and 

fishing tribes differ ? Why ? 

2. What is the economic mark of semi-civiHzation ? What stages 

have this as their special character? 

3. What other economic changes from the earlier stage are found 

in the pastoral stage? 

4. What is the fundamental difference between the agricultural 

stage and the pastoral? What economic results flow from 
this difference? 

5. What is the economic mark of civilization? What stages have 

this special character? 

6. What is the relation between trades and commerce? 

7. What great economic institutions grew out of trades and com- 

merce ? 

QUESTIONS FOR STUDY AND DISCUSSION 

1. How did man acquire the art of domesticating animals? of 

controlling plant Ufe? 

2. Has free labor an economic advantage over slavery? Has it 

always had such an advantage? 

3. Has free labor a moral superiority over slavery ? Has it always 

had such superiority? 



42 ELEMENTARY PRINCIPLES OF ECONOMICS 

4. If history discloses the fact that economic changes have brought 
about changes in men's ideas of right and wrong, are further 
changes of the same sort to be expected? 

LITERATURE 

See references at close of preceding chapter. Also : 

Ashley, W. J. : Introduction to English Economic History and 

Theory, Ch. I, § 6. 
Biicher, C. : Industrial Evolution, p. 154. 
Cunningham, W. : The Growth of English Industry and Commerce, 

Ch. IV, § 114. 
Ely, R. T. : Studies in the Evolution of Industrial Society, Chs. Ill 

to V. 
Gamble, F. W. : The Animal World. 
Genesis, Ch. XIII. 

Maine, Sir Henry : Early Law and Custom, Ch. VIII. 
Rogers, J. E. Thorold : Work and Wages, Ch. Ill, pp. 55-66. 
Scott, D. H. : The Evolution of Plants. 



M 



CHAPTER III 
THE INDUSTRIAL STAGE 



We come now to the last of the stages in man's economic 
development. Inasmuch as this last stage is the one in which 
we are living, it will be well to give to it a more detailed 
study than has been given to the preceding stages. After a 
general description of the characteristic differences between 
the industrial stage and the stage which preceded it, we shall 
pass on to study the history of the great movement by 
which the industrial stage was ushered in. As it was in 
England that the movement began, and as it is in the United 
States that the movement has perhaps proceeded to the 
greatest extreme, we shall consider the history of the 
movement with reference to these two countries. 

A closer study of the period than we shall be able to 
devote to it would disclose the fact that the industrial stage 
has up to the present shown three distinct phases. The 
distinguishing characteristic of the earliest phase — say 
from 1760 to 1830 — was the development of machine in- 
dustry and the application to it of steam power. From about 
1830 to about 1870 the distinguishing characteristic of in- 
dustry was the development of steam-power transportation. 
From the latter date to the present the most striking fact 
has been concentration and integration in industry under a 
rapidly spreading corporate organization. The word con- 
centration describes a tendency toward the production of 
increasing amounts or proportions of any product by single 

43 



44 ELEMENTARY PRINCIPLES OF ECONOMICS 

business units ; while the word integration describes a tend- 
ency towards the production by single business units of 
an increasing number of commodities, usually closely allied. 
To study these minor periods in detail would require greater 
space than can be given to the subject in a book of this sort ; 
but in our study of conditions in the United States at various 
points in the text we shall have occasion to throw further 
light upon them. 

General Characterization. — As we have said, men may 
manufacture by hand or by potver. It was a great step 
forward when man learned to manufacture at all ; it was a 
transformation of society when man learned to manufacture 
by power. Mere human muscle is an insignificant force as 
compared with the external forces of nature, and man's 
greatest accomplishments when he depends upon his own 
unaided efforts are relatively unimportant. But man has 
more brains than any other creature, and progresses by their 
use. 

It is hardly necessary to state to the student that the in- 
dustrial stage began with the inventions and discoveries 
that resulted in the steam engine. The date usually asso- 
ciated with this important change is 1769. Here, as in the 
preceding chapter, it will conduce to clearness if we analyze 
the situation and show the characteristic contrasts between 
the industrial stage and the former stage of economic develop- 
ment. 

1 . Relations between Classes. — Under the old system of 
hand manufacture, each master in a trade typically worked 
by himself or with a few others, apprentices or journeymen, 
who in time would normally become masters themselves. 
Hence we may say that men in the full possession of their 
trade worked on their own account and owned what they made 
as well as the means of manufacture. When prices rose, the 



THE INDUSTRIAL STAGE 45 

benefit went to them. Strictly speaking, there were no 
class divisions in manufacture, an apprentice or a journey- 
man being simply a master " in the making," living on terms 
of intimacy in the master's family, and in many cases marry- 
ing the daughter of the master and later succeeding to the 
business. 

Rise of Factories. — But it is manifestly impossible for 
every workman to own an engine and elaborate manufactur- 
ing machinery. The result of the application of steam to 
manufacturing, therefore, was that a few men, more enter- 
prising or wealthier than the rest, made the experiment, 
bought high-priced machinery, employed workmen, and 
quickly distanced their conservative competitors who re- 
sisted the change. Under these conditions, as we can now 
see, the factory system was bound to grow and to supplant 
the old system of house industry. Those who resisted had 
to go to the wall. They did not enjoy the process nor were 
they patient under its operation; but at length, their 
fortunes wasted, their business ruined, their hope of successful 
resistance gone, they yielded and sullenly sought places as 
workmen in the new factories. 

Before this great industrial change, employer and employed 
were not, as we have said, sharply or permanently divided by 
class distinctions. Living and working together, apprentice 
and master had that mutual respect, which came from the 
remembrance of his own apprenticeship on the part of the 
master, and the hope of a future position of independence in 
the breast of the apprentice. Now we have two distinct 
industrial classes, with interests that seem irreconcilable, 
and between them is a great gulf, which in an old society 
comparatively few men can hope to cross. 

2. The Wages System. — Formerly the workman had what 
he made and sold it for what he could get. This was natural 



46 ELEMENTARY PRINCIPLES OF ECONOMICS 

under a system of divided labor in which each man made one 
article and that a whole article. But in the more efficient 
processes of production that obtain to-day, there is necessary 
a much greater division of labor, or rather combination of 
labor. Now, it requires many men working together to 
make a single article efficiently. But when a group of men 
have made a case of shoes, of which one has cut out the soles, 
another has made the heels, etc., who can say how many 
shoes the individual workman has made ? Then, too, the 
employer has furnished the materials and machinery and has 
assumed the risk of loss. He must be paid. How many 
shoes shall be his portion of the whole ? Some way out of 
the trouble must be found ! As a matter of fact the way 
adopted was the simplest one and perhaps the best. The 
employer takes all the shoes, and gives the workmen for 
their labor, not the actual product of their labor, but a 
stipulated wage which is represented to be an equivalent. 
And thus has grown up the modern " wages system " of 
employing labor. 

3. Competition. — Under the old gild system of manu- 
facturing for purely local markets, prices, as well as many 
other elements of industry, were largely regulated by custom 
or by law. The man trying to undersell his neighbor would 
have been an object of public contempt and hatred. Men 
sometimes entered into rivalry or competition to see who 
could make goods of the best quality, but even here custom 
and law sometimes entered to reduce all to a dead level by 
determining what the quality of the commodity should be. 

But with the growth of great markets in the industrial 
stage all this was changed. Factories competed not for the 
trade of a single city or county, but for that of a whole 
country or of the world. The producers were no longer 
neighbors living in close and friendly intercourse, but great 



THE INDUSTRIAL STAGE 47 

hostile businesses, often situated in different parts of the 
country. The handicraft stage had been prevailingly a 
period of " town economy " ; the industrial stage was a 
period of " national economy," which in our own time has 
developed into something very like a " world economy." 
Under such conditions, competition once begun must grow 
ever fiercer and fiercer. It was not a competition in well- 
doing but in money-making. 

The struggle had its good results. It was what men 
needed to stimulate their energy and enterprise. Invention 
followed invention; business rapidly centered in places 
where it could be carried on at the greatest advantage ; labor 
processes were divided and subdivided as the increase of 
machinery and the growth of markets rendered division 
profitable, and by these and other means the cost of produc- 
tion was constantly lowered. 

Thinkers of the time not unnaturally were profoundly 
impressed by the rapid increase of wealth due to competi- 
tion — or rather to freedom of industry — as well as by 
the irksomeness of the old gild restrictions, to which appeals 
were being made by those who wished to curb the new move- 
ment. These thinkers overlooked the evils of unrestricted 
freedom, and in consideration of its benefits concluded that 
the state should not try to guide industry, as it had so long 
been doing, but that industry needed only to be left alone to 
achieve its grandest results. It will be necessary later to 
note some of the results of the attempts of the government 
to follow this principle. 

4. Banking and Credit. — All great movements are com- 
plex, the various parts being mutually cause and effect, one 
of another. The preceding stage had developed money; 
the industrial stage has developed credit. Credit has been 
in part the result, as it has been in part a cause, of the other 



48 ELEMENTARY PRINCIPLES OF ECONOMICS 

great changes that characterize the age. Money is still 
used as the most common medium of exchange in retail 
trade and in small transactions generally, but in large trans- 
actions it has been displaced in great measure by the various 
instruments of credit, such as checks, drafts, and bills of 
exchange. Moreover, to secure a proper organization of 
credit, it has been necessary for society to develop the system 
of banking as we know it to-day. Thus one great improve- 
ment produces others and is in turn produced by them. In 
1782 there was but one bank in the United States ; in July, 
1914, there were 7578 national banks ; 14,512 state banks ; 
1064 private banks; and 1564 loan and trust companies, — 
an aggregate of 24,718 institutions that were engaged largely 
or wholly in commercial banking. 

5. Transportation. — • Before the beginning of the indus- 
trial stage, the problem of moving things was far less impor- 
tant than it has since become. Not much could be moved 
long distances by land while only packhorses and wagons 
were used. Often, too, the roads were such as prevented 
the best results even from such a mode of locomotion. 
Transportation by land being so difficult, commerce de- 
pended then, as always before, chiefly upon water. Sailing 
vessels, though slow, could carry even bulky commodities 
between places connected by water, and large cities were 
therefore always on the water, most frequently on the sea 
but sometimes on lakes and rivers. We have become more 
independent of waterways furnished by nature or by art. 
Important cities can now grow up miles away from navigable 
rivers or the seacoast, though the importance of water 
communication even to-day is attested by the slight pro- 
portion of cities that are so situated. In all this we see 
that civilization is marked by man's increasing domination 
of nature. 



THE INDUSTRIAL STAGE 49 

6. Moral and Legal Restraints. — Always In past stages 
of economic development, we have seen a sharp distinction 
drawn between neighbors and strangers. The family and 
neighbors have formed a constantly widening circle, and 
have always been protected by detailed law and custom; 
strangers, on the other hand, were exposed to whatever treat- 
ment might be considered advantageous. Indeed, the 
word " stranger " in many languages even had the added 
meaning of enemy. It is characteristic of the industrial 
stage that the distinction between neighbor and stranger 
is no longer a clearly defined one. It may be asked. Have 
all men, then, become brothers, or have they all become 
strangers and enemies? Few will claim that men in their 
business dealings are brotherly. Yet if we look at the whole 
of the industrial stage, we shall find reasons for believing 
that the change which has been taking place has been to 
make neighbors of those who were strangers and enemies. 
The great and sudden widening of the circle of neighbors loas 
naturally accompanied by a weakening of the feeling of neigh- 
borliness. But in our own time more than ever before there 
has been a conscious effort to strengthen this feeling of 
neighborliness or brotherhood, and to widen the circle even 
beyond national lines. In the face of the horror of a great 
European war, men are still coming more and more to see 
that " above all nations is humanity." 

SUMMARY 

1. The industrial stage has ah-eady passed through three phases. 

2. In the industrial stage men make things by machinery operated 

by power. 

3. The older intimacy of industrial classes gives place to a sharp 

and wide separation between employers and employees. 

4. Domestic industry gives place to the factory system. 

5. The worker now sells nothing but his labor, under what is 

known as the wages system. 



50 ELEMENTARY PRINCIPLES OF ECONOMICS 

6. Competition on an ever-widening scale replaces the force of 

custom. 

7. Credit and banking rapidly develop, both as cause and effect 

of the increased production of goods. 

8. The increase in the complexity of economic conditions and re- 

lations has necessitated new legal and moral restraints and 
a great widening of the circle of neighbors. 

QUESTIONS FOR RECITATION 

1. Characterize the three phases of the industrial stage, and give 

approximate dates. 

2. Name the different kinds of power used to run modern machinery. 

3. Distinguish factory industry from domestic industry. 

4. What is the wages system and how did it develop ? 

5. How did the widening of markets sharpen competition? 

6. Explain the relation of credit and transportation to the other 

characteristic features of the industrial stage. 

7. Are men more or less brotherly in our day than in earUer stages 

of history ? 

QUESTIONS FOR STUDY AND DISCUSSION 

1. Can you think of other economic differences than those men- 

tioned in the text that distinguish the industrial stage from 
earlier stages? 

2. Can you think of other important characteristics of the latest 

phase of the industrial stage? 

3. What are some of the ways in which the industrial revolution 

has changed the character of war? 

4. Name some of the international movements and institutions of 

our time that are both causes and results of a growing world 
economy. 

5. Have modern changes in industrial forms and methods any 

connection with poUtieal democracy? with education? with 
the question of woman suffrage? 

6. Has the increasing monopoly of our time been a result of com- 

petition ? 

LITERATURE 

Ely, R. T. : The Evolution of Industrial Society, Pt. II, Ch. VII. 
Hobson, J. A. : The Evolution of Modern Capitalism, Chs. II and IV. 
Toynbee, Arnold : The Industrial Revolution, Ch. IV, pp. 46-57. 
Webb, Beatrice (Potter) : The Case for the Factory Acts. 



CHAPTER IV 
THE INDUSTRIAL STAGE IN ENGLAND 

It was in England that the change from the handicraft 
stage to the industrial stage first began and was most rapidly 
accomplished. The change is generally called in England 
the Industrial Revolution, and the name is in many ways 
appropriate. A change which takes place so gradually that 
life adjusts itself to the new conditions without great loss 
or suffering, — a change like that which occurs in the plant 
that is always growing, yet seems to be at a standstill, — 
such a change we call a development or evolution. But a 
change which comes so rapidly that life cannot promptly 
adjust itself to the new conditions, a change that breaks 
down the old order with much confusion and suffering, — 
this we call a revolution. It would be a mistake, however, 
to suppose that even in England the new system fell from the 
heavens without omen or hint of its coming. It is impossible 
in this small book to discuss the point at length ; it must be 
sufficient to w^arn the student against an exaggerated idea 
of the suddenness or violence of the change. 

To understand the English Industrial Revolution aright, 
we must first go back to study the condition of things just 
before it began. 

Agriculture. — First of all it is important to bear in mind 
that eighteenth-century England, though already a leader 
among industrial and commercial nations, was still pre- 
dominantly agricultural. During the century the popula- 

51 



52 ELEMENTARY PRINCIPLES OF ECONOMICS 

tion of the nation grew from about six million to about nine 
million inhabitants, of whom probably more than half 
lived lives that depended directly, in whole or in part, on 
agriculture. In the second place, it should be noted that 
the revolution in agriculture in the eighteenth century in a 
large measure preceded and conditioned the revolution in 
manufactures. The English people of the eighteenth cen- 
tury were earlier and more keenly aware of the tremendous 
changes that were taking place in the country than of those 
that were revolutionizing industry. The later social signifi- 
cance of the industrial revolution has so seized upon the 
imagination of men that we are in danger of forgetting the 
real magnitude and importance of the contemporary revo- 
lution in agriculture. 

Space cannot be allowed here for a complete and itemized 
description of agricultural conditions as they were in England 
in the first half of the eighteenth century. Such a description 
would carry us into a detailed and complicated technical and 
historical study. It must suffice to point out that in the 
form and ownership of " farms," in the breeds of farm 
animals, and in the processes and tools of farming, conditions 
were almost as widely different from those with which we 
are now familiar as are the steam engine and aeroplane 
from the ox cart and the stagecoach. 

The various breeds of live stock were little advanced from 
their primitive originals. Such finer breeding of sheep as 
had been achieved was directed toward the production of 
fine wool for fine clothing, with comparatively little regard 
for the production of food. As compared with modern times, 
horses, hogs, and cows were very little distinguished from 
the wild species that are still to be found in some parts of 
the world. Farm tools and processes were hardly in ad- 
vance of those known to the Hebrew patriarchs, as they are 



THE INDUSTRIAL STAGE IN ENGLAND 53 

pictured for us in the Old Testament. The plows, made 
almost without metal, could turn only the shallowest 
furrow; hardly any other implements were available for 
" fitting " the land ; hay and grain were still cut with sickle, 
scythe, or cradle; wagons were of the simplest and rudest; 
grain was threshed with the flail or tramped out by slow- 
footed oxen upon the threshing floor. 

The land was still largely held under a surviving form of 
the age-old manorial system, which was superimposed by 
the Normans upon the existing social order of the Saxons. 
After the invasion, William the Conqueror granted his sup- 
porters large estates on condition of their making certain 
payments and rendering various services, military service 
in time of war being especially prominent. These supporters, 
the lords of the manors, in their turn granted portions of 
their estates to dependents on similar conditions. Under 
this military organization of feudalism, the English village 
of the Middle Ages developed into a little world of its own, 
its members closely knit together into a small self-supporting 
community. The center of the village was the lord's manor 
house, of which the principal room was the hall. This hall, 
a familiar picture to all readers of Sir Walter Scott's novels, 
served as the lord's court of justice, dining room, and general 
living room of his household. In a large manor house 
there would also be a kitchen, a pantry, a sewing room, a 
brewery, a bakehouse, a laundry, and a chapel. The 
personal retinue of the lord was sometimes very large. 
Besides the sheriffs, bailiffs, and stewards who administered 
his estate, there were also squires, pages, grooms, butlers, 
musicians, and other retainers. 

The demesne, belonging exclusively to the lord, was some- 
times a compact area of land like a modern farm, immediately 
surrounding the manor house ; but generally it was in large 



54 ELEMENTARY PRINCIPLES OF ECONOMICS 

part dispersed like the land of the lord's tenants in the 
common fields, as described below. The poorer villagers, 
the villains and serfs, were dependent upon the lord and cul- 
tivated his demesne, giving him part of their time and keep- 
ing part for their own work. 

The chief portion of the estate was called the common or 
open fields, and these were cultivated by independent 
farmers and laborers, some of whom plied the various trades 
of the village ; they were the millers, blacksmiths, barbers, 
cobblers, tinkers, etc. We generally hear of " three fields, " 
because the land Vv^as divided into three parts, and each field 
was again divided into a great many small strips, so that the 
common fields had, as Cheyney describes it, " the appear- 
ance of a great irregular checkerboard or patch-work quUt." 
The strips of land were allotted to the tenant farmers and 
other dependents, and each had a right to the produce of 
his strips. However, he was not free to cultivate them as he 
chose, but he had necessarily to follow the general custom 
of the village. The proper seasons for plowing, sowing, and 
harvesting were appointed by the reeve. Generally the 
three-course system of farming was followed, explaining the 
division of the land into the three fields. The crops were 
rotated, each field lying fallow every third year, after bearing 
wheat or rye the first year, and some spring crop, such as 
corn, barley, oats, beans, or peas, the second year. Various 
strips belonging to one farmer were accordingly scattered 
over the different parts of the common fields. After harvest- 
ing, all the villagers were free to graze their cattle over the 
stubble "of the cultivated or arable land. 

The uncultivated meadows formed a still different part of 
the manor, and after the hay was cut and gathered, the cattle 
of the villagers were likewise turned out to graze on these 
meadows. Marshes, woods, and neglected land constituted 



THE INDUSTRIAL STAGE IN ENGLAND 55 

the waste. The cattle, horses, sheep, and swine of the 
village were sent out to pasture on the waste under the care 
of village herdsmen. 

By this description it will be seen how widely the English 
village of early times differed from the collection of independ- 
ent farms which constitutes the modern agricultural com- 
munity. 

The manorial system was naturally greatly modified during 
the course of the Middle Ages. The serfs and the villains 
gradually gained complete liberty of person, and we find also 
a class of yeoman farmers, who were independent landowners, 
working their small farms largely with their own hands. 
How large this class had been in early times is doubtful. 
The land, however, still continued to be held in small strips. 

Inclosure. — Large-scale operations and highly productive 
farming were impossible under such a confused system of 
holdings. The old system had accordingly to give place 
to a new, and " inclosure " was imperatively demanded. 
Under the old system, the various classes who gained their 
living from the land had formed what may be called a partner- 
ship ; — they had shares in a " bundle of rights." Inclosure 
signified a putting together of the scattered strips into in- 
dividual farms and an abolition of the common rights of 
pasturage on the open fields : in other words, it meant a 
dissolution of the old partnership of the cultivators of the 
soil, and individual cultivation of farms held separately, — 
just the arrangement which we in the United States take 
as a mere matter of course. In the preambles to the In- 
closure Acts it is stated that 

" the open and common fields lie dispersed in small pieces 
intermixed with each other, and inconveniently situated ; 
that divers persons own parts of them, and are entitled to 



56 ELEMENTARY PRINCIPLES OF ECONOMICS 

rights in common on them, so that in their present state they 
are incapable of improvement, and that it is desired that they 
may be divided and inclosed ; a specific share being set out 
and allowed to each owner." 



As a result of inclosure, great improvements in the general 
organization of farming took place. Great technical im- 
provements, too, suitable to large-scale farming, were in- 
troduced. " Norfolk husbandry," with its four-course ro- 
tation, alternating green crops advantageously with cereals, 
successful schemed of breeding, better draining, more efficient 
dressing with manures, and new economical uses of the soil 
were notable discoveries which marked an epoch in English 
agricultural history. 

Evils of the Transition Period. — We have spoken so 
far only of the benefits of inclosure, but the gain to society 
was attended with a good deal of injury to individuals and 
classes. The small villager lost an opportunity of turning 
cattle out to graze, and if he received money compensation 
for this loss it was often wasted. The laborer frequently 
was separated from the soil, and this misfortune was 
greatly aggravated by the fact that he could no longer 
pursue in his house his simple spinning and weaving, owing 
to changes brought about by the Industrial Revolution, 
which we are to discuss in the following pages. Inclosure 
was simply a part of a great movement toward large-scale 
production, and in accordance with the laissez-faire philos- 
ophy of the time no special pains were taken to prepare the 
laborer' for the great transition. 

The yeomen, too, were greatly affected by the movements 
of the times, and indeed tended rapidly to disappear as a 
class. Inability to meet the burden of heavy mortgages 
and the temptation to sell their land to rich business men. 



THE INDUSTRIAL STAGE IN ENGLAND 57 

who coveted the social status and poHtical rights of landlord- 
ship, may have been cooperating influences ; but the superior 
advantages of extensive holdings for the growth of grain by 
the new scientific methods of cultivation certainly appear 
to have prompted many of them to change their lot for that 
of large tenant farmers. The economic trend, in fact, 
favored large farming at the time, and placed a discount in 
comparison on the methods of small cultivation. This was 
the reverse side of the shield, the front of which was agri- 
cultural improvement. The small man was not equal to the 
situation, which could have been met only by wisely con- 
trived social planning and social action. Each man had to 
look out for himself, make his own contracts, seek his own 
employment, find it or go without, educate or not educate 
his children as he saw fit, etc. In fact, the entire life of the 
village community was radically altered. It was no longer 
an organic, self-centered whole. 

Manufacture. — But it was in the department of manufac- 
tures that the greatest change was to occur. In 1760, the 
system of hand manufactures was still general. When Adam 
Smith, in his Wealth of Nations, published in 1776, wrote, 
" A man grows rich by employing a multitude of manu- 
facturers," he was using the word manufacturers in its then 
usual sense, to denote artisans or mechanics. The principal 
manufactures were woolen goods, which England exported 
in 1770 to the value of about £4,000,000, that being nearly 
a third of her total export trade. The methods of manu- 
facture were primitive. In the textile industry, for instance, 
the " manufacturer " had his home, his cows, his horse, and 
his poultry ; he bought his wool ; his wife and " spinster" 
daughters spun it into yarn ; and together they wove it and 
sold it at the " fair," enjoying all the proceeds. As the 
spinning on the old spinning-wheel was done one thread at 



58 ELEMENTARY PRINCIPLES OF ECONOMICS 

a time, it followed that a weaver with a hand-loom could 
work up the yarn more rapidly than it could be spun. 

Even before 1760, however, a change in the system of 
making and marketing had already begun. Cities began 
to attract the hand-workers. The inevitable tendency 
to divide the processes of production showed itself. The 
workers found it difficult to attend to the buying of the wool, 
the spinning, the weaving, and the selling of the finished 
goods. So the processes were divided, and middlemen had 
begun to appear, who bought yarn from the spinners and sold 
it to the weavers. Later, in some cases, they ceased to sell 
the yarn, supplying it instead to the weavers on contract, 
keeping a claim upon the cloth, and paying a stipulated sum 
for the weaving. Thus the old " manufacturer " had al- 
ready in many places become a workman, a wage-earner, 
and in a measure dependent upon a " capitalist," who fur- 
nished the stock. Many of the germs of the factory system 
therefore existed as early as 1760, though as yet the work 
was generally done by hand power with very simple imple- 
ments. 

What has just been said in describing the technical con- 
ditions in the woolen industry would apply with only neces- 
sary changes to the other old English handicrafts. Next in 
importance to the woolen industry was that of iron; but 
England in 1737 imported perhaps twenty thousand tons 
of iron, or more than she herself produced. After 1740 the 
iron trade had begun to fall off because supplies of charcoal for 
the charcoal smelting of the time were almost exliausted. 
Other forms of manufacture, that are now of first impor- 
tance in England, such as cotton, linen, and silk, had hardly 
begun. 

Transportation. — Such goods as were manufactured 
could be moved within the country only with great difficulty 



THE INDUSTRIAL STAGE IN ENGLAND 59 

and at great expense. Transportation facilities were very 
backward. One traveler of the time, who speaks of the 
highways as " most execrably vile," tells us that he found 
ruts four feet deep, and that he " saw three carts break down 
in a mile of road." Such being the condition of the roads, 
pack horses were still the common means of transporting 
goods to and from inland markets. The only improvement 
before 1760 consisted in the building of a few canals. 

Economic Legislation. — Of all the characteristic condi- 
tions, that of the economic legislation of the period seems most 
strange to the modern reader. The medieval notion of 
government was still nominally in force. In general, this 
notion was that detailed special legislation was required 
for many cases in which we of to-day regard general laws as 
preferable. Thus the state passed many laws to regulate 
religion, agriculture, manufacture, and commerce. Some of 
these laws require our special attention at this point. We 
have already remarked upon the fact that men of the earlier 
days did not understand or believe in competition. They 
dreaded the mischief that a stranger might work, coming 
into a town and carrying on trade in an irregular fashion. 
The circulation of laborers from one parish to another, or 
from one town to another, was also restricted by what is 
sometimes known as the Laio of Settlement. This originated 
in a statute, passed in 1662, which provided that a workman 
coming to a parish must, within forty days of his coming, 
give evidence or surety guaranteeing the parish against his 
becoming a charge upon the taxes for the relief of the poor. 
The act was originally intended as a measure against wastrels 
and vagabonds. In its application, however, it not only 
affected vagabonds but every poor man wishing to move 
from one parish to another, until it became, in Adam 
Smith's words, " often more difficult for a poor man to pass 



60 ELEMENTARY PRINCIPLES OF ECONOMICS 

the artificial boundary of a parish, than an arm of the sea 
or a ridge of high mountains." Another law obstructing the 
free circulation of labor from one employment to another 
was the Elizabethan Statute of Apprenticeship, providing 
that one could become a member of a trade only after seven 
years of apprenticeship and only in a specially prescribed 
manner. This statute was based upon older statutes of the 
craft-gilds existing for centuries before. The purpose of 
this regulation was to protect the various trades from over- 
crowding and from irregular methods. It must be remem- 
bered that at the time when such regulations had grown up 
competition in the modern sense was an impossibility, and 
nothing but such customary or legal restrictions could 
avail to guard the interests of the individual and society. 

Wages. — Perhaps the most striking of all the economic 
legislation of the time was the old law which left to the boards 
of county judges the work of fixing the wages of workmen. 
Historians differ in opinion as to how generally or rigorously 
this law, which was embodied in many statutes running 
back for centuries, had been enforced, but probably it had 
never been entirely inoperative, and in any event the exist- 
ence of such statutes throws a flood of light upon the 
state of mind of the dominant classes in England. 

In explanation of the law it was often held that workmen 
would be oppressed if left to the mercy of employers ; but 
the main purpose of the law seems rather to have been to 
protect the employer against high wages, and the spirit of 
the administration of the law seems to have conformed to 
that purpose. Inasmuch as the workmen were thus " pro- 
tected" by law in the matter of their wages, combinations 
among them to improve their condition were held unneces- 
sary and dangerous, and were therefore strictly forbidden. 

The Condition of Thought in 1760. — We should fail to 



THE INDUSTRIAL STAGE IN ENGLAND 61 

understand the Industrial Revolution were we to confine 
our attention to the economic life. In 1760 there had 
recently begun a tremendous revolt against the whole system 
of legislation and government just described. But it would 
be a mistake to suppose that this revolt, which eventually 
carried everything before it, showed itself only in the field 
of industry. Indeed, the restrictions that aroused the 
greatest opposition were those upon conscience and religious 
worship. Next to religious liberty, political liberty was the 
desire of all Englishmen. Even while restrictions upon 
trade were being accepted without vigorous protest, the pas- 
sion for personal liberty worked itself up to a fanaticism. 

It was under the influence of this spirit of protest that 
Adam Smith wrote, and in 1776 published, his Wealth of 
Nations, the most influential book on economics that has 
ever been written. Men — so runs his argument — are 
by nature free and equal. Inequalities are of man's making, 
and are to be avoided. Leave men alone and equality will 
reassert itself. What men need in their business is not 
protection but liberty. Under a system of free competition 
each man will seek his own interest, and, in seeking his own 
interest, will be led by a sort of natural and beneficent provi- 
dence to promote the best interests of society as well. If the 
result is not the best that is ideally conceivable, it is at least 
the best that is practically possible, and is certainly better, 
thought Smith, than can come from any interference of 
government. 

There is an interesting story, perhaps apocryphal, that 
at about this same time in France a group of merchants 
presented themselves before their king to protest against 
restrictions under which they labored. The king, after 
listening to their statement, asked them benevolently what 
they would have him do. Whereupon, as the story runs, 



62 ELEMENTARY PRINCIPLES OF ECONOMICS 

the spokesman of the party, Monsieur de Gournay, an- 
swered laconically: "Sire, laissez-faire; laissez passer." 
These words " laissez faire " have for a century been used 
to describe the economic philosophy and the political prac- 
tice of passivism, especially in industry. Whether such an 
incident gave rise to the name, or whether the name made the 
myth, is immaterial. The story, if not true, is well found. 

Changes in Manufacture. — In 1769, while Adam Smith 
was writing the book that was to exert so profound an in- 
fluence upon the economic thought and practice of the 
future, a friend of his, James Watt by name, was preparing 
the way for a revolution in the world's industry, by his 
inventions in connection with the steam engine. 

In the same year, too, there began a series of inventions 
which, during the next fifty years, completely revolutionized 
the textile industry, and incidentally gave cotton manu- 
facture, instead of the manufacture of woolens, the first place 
in English industry. The invention of the spinning- jenny 
first made possible a vast increase in the production of yarn 
for weaving, and since better goods could now be produced 
at a lower price than before, the demand for the goods was 
much increased. Hence weavers, still using the old hand- 
loom, were kept busy at higher wages than they had before 
received. But within a few years the power-loom for weav- 
ing was invented and improved, and many of the weavers 
found themselves out of employment. As it was possible 
for a single person to tend four power-looms, three out of 
four of the workmen were thrown out of a job until the in- 
creased demand for the finished goods should increase the 
number of looms. Moreover, as weaving by the power- 
looms required deftness rather than strength, women and 
children came to be employed instead of men, because they 
could be hired at lower wages. Just at the close of the 



THE INDUSTRIAL STAGE IN ENGLAND 63 

century, Eli Whitney, our Connecticut Yankee, gave a still 
further stimulus to the cotton industry by inventing the 
cotton gin, a device for clearing the cotton of its seed. The 
greatest change was wrought in the cotton-manufacturing 
industry. For technical reasons England had been unable 
to establish this industry, which was carried on chiefly in 
India ; but the new inventions for textile manufacture and 
the introduction of steam power quickly changed the seat 
of the industry from India to England, and gave it a fore- 
most place in the English economy. Similar results at- 
tended changes in the manufacture of woolen, linen, and 
silk goods. 

The new machinery was at first operated by water power, 
and factories first sprang up chiefly in North England in 
places where rapidly flowing streams furnished an economical 
" head." Soon, with the development of the steam engine, 
and the resulting development of coal production, the center 
of industry was transferred to the " Midland " counties, 
where England's iron, the material of her machines, and 
England's coal, the basis of her motive power, underlie the 
whole region. 

By the invention of the steam engine, the output of 
England's coal mines was vastly increased, since shafts could 
now be sunk deeper and the mines kept free from water. 
With increased supplies of coal, iron could be worked by the 
blast furnace, instead of by the old process of charcoal 
smelting, and the iron trade was therefore quickly revolu- 
tionized. The importance of this change may be understood 
when we remember that under modern conditions of industry 
those nations that surpass in the production and manufacture 
of iron and steel for their machinery hold the leadership of 
the world's trade. 

Changes in Transportation. — The great change in 



64 ELEMENTARY PRINCIPLES OF ECONOMICS 

methods of farming and manufacturing naturally gave a 
new stimulus to the development of improved transportation 
facilities. The public highways were first greatly improved 
under the direction of such engineers as Telford and 
Macadam, from whom methods of road construction have 
taken their names. New and longer canals were dug, and 
the movement would have gone much farther had it not 
been checked after 1825 by the development of the sys- 
tem of steam railways. Even before 1825, when the first 
steam railway was opened, steam had for some years been 
successfully applied to water transportation. Within a half 
century, England became one vast network of railways, and 
it became possible to transport the bulkiest commodities 
from one end of the kingdom to the other more cheaply 
than they had been moved from one county to another with 
the old means of transport. Indeed, wheat can now be 
carried from our Western grain fields and laid down in the 
English markets more cheaply than it could be moved an 
average distance of from thirty to forty miles in the England 
of 1760. 

Changes in Economic Legislation. — With the passing of 
the old industrial methods came a demand for freedom from 
the old vexatious restrictions. Whatever might have been 
said in justification of such restrictions in earlier days, the 
time for them had now passed, and they were destined to go. 

The old laws were, of course, not repealed in a body. 
Such a thing never happens in England, and is a rare occur- 
rence in any country. Some laws were repealed, some simply 
died. Thus, the law requiring seven years' apprenticeship 
before one could enter certain trades died during the latter 
part of the eighteenth century. Years afterward, at the 
beginning of the nineteenth century, in the labor troubles 
of the time, some workmen in desperation turned back to 



THE INDUSTRIAL STAGE IN ENGLAND 65 

the old law and prosecuted employers for violating it. 
The result was that the law was at first suspended and later 
repealed, as being plainly ill adapted to the new conditions 
of industry. Thus, little by little, the old laws were re- 
pealed or forgotten, and men were left free to bargain and 
manufacture as they pleased. 

Labor Laws. — Of the many old laws regulating labor, it 
must be remembered that they had been designed not so 
much to help the workmen as to check their growing power 
and aspirations. When Adam Smith declaims against labor 
laws, he has in mind laws directed against labor, not laws 
like those of modern times, which have been designed to 
benefit workmen. Indeed, he says in one place that if any 
law chanced to be beneficial to labor, it was sure to be a 
just law. A striking instance of the unfairness of the old 
labor laws is seen in the case of the statutes against combina- 
tions. Although from the first capitalists were allowed to 
combine, workmen were forbidden to do so under severe 
penalties. Even after the laws bearing on apprenticeship, 
regulation of wages, and inspection of goods had been re- 
pealed or had lapsed, this law against workmen's combina- 
tions continued operative, and under it men who attempted 
to form labor-unions were at times severely punished. But 
eventually this law also was repealed. 

Results of the Changes. — 1 . Industrial Disturbance. — 
The results of the great changes that constituted the 
Industrial Revolution have been startling. The area of 
the markets for various commodities was marvelously 
widened, and distance from the consumer no longer weighed 
heavily in the mind of the manufacturer in determining the 
placing of his plant. The balance of convenience rather 
inclined toward concentrating industries in those places 
where they could be carried on to special advantage. Thus, 



66 ELEMENTARY PRINCIPLES OF ECONOMICS 

there was first a concentration of industries near favorable 
water power, and later near facilities for the production of 
steam power. This change took place usually not by the re- 
moval of old plants and industries to new localities, but by 
the growth in favorable centers of such powerful rivals that 
the older factories were gradually forced to go out of business. 
Thus, not only were country artisans forced out of employ- 
ment, but even certain towns were sacrificed to others that 
enjoyed a more favorable situation. 

2. Growth of Cities. — Another important result of the 
changes in the methods of industry, and particularly of the 
changes in the methods of transportation, was the growth of 
cities. While concentration of population has had many 
beneficent results, and promises still other and greater ones 
in the future, the evils connected with such aggregations of 
people have formed one of the most serious problems that 
our generation has to face. 

3. Fluctuations in Trade. — One cause of the comparative 
simplicity of the old and slow-going system of manufacture 
and trade was its great regularity. One year was much like 
another. Producers could calculate the amount of their 
product that would be required, and could calculate also 
what would be the return to their labor. With the growth of 
national and international markets came increasing com- 
plexity of wants and increasing ficldeness of fashion. It was 
no longer easy to know what things would be wanted or in 
what quantities goods would be taken by consumers when 
produced. A period of overcautious production would lead 
to unduly high prices. New capital would be tempted by 
the profits, and the old manufacturers would forget their 
caution. Then would come a glut, prices would fall dis- 
astrously, factories would close, and workmen would be 
thrown out of employment. But depriving a large section 



THE INDUSTRIAL STAGE IN ENGLAND 67 

of the consuming public of its purchasing power, — its wages, 
— is not an ideal method of reviving industry. Thus times 
of plenty for the workmen would be succeeded by times 
of great want, with all the evil result upon character that 
uncertainty of life and work can produce. 

Reaction against the Passive Policy of Government. — 
We have already explained that accompanying the change 
in industrial methods went a radical change in opinion as 
to the proper attitude of the state toward human affairs, 
including industrial affairs. This change was in part due 
to a feeling that men had really become so intelligent and 
reasonable and just that they would know and respect one 
another's rights. But the chief reason for the change was 
the general acceptance of Adam Smith's central doctrine that 
self-interest will regulate men's actions for the general good 
more nearly and more surely than can any statutes framed by 
man. We have now to study in detail some of the points in 
which this theory of governmental passivity has broken down 
under the test of experience, and some changes that men have 
found themselves compelled to make in consequence. 

Although we shall have occasion to refer to the matter 
again in studying the industrial history of our own country, 
it may be well to point out here that in no other country 
did the laissez-faire idea gain such a hold upon the minds of 
the people as in the United States. Of the great modern 
nations Germany was probably least affected by the obses- 
sion, and France less than England, while even in England 
recognition of the necessity of social control of industrial 
forces and movements developed gradually during the nine- 
teenth century. In our own country we were so slow in 
awaking that some critics feel that we almost lost our 
birthright to our wonderful natural inheritance. Indeed it 
is only during the few years of the present century that we 



68 ELEMENTARY PRINCIPLES OF ECONOMICS 

have become alert to the situation ; and we are still confused 
as to remedies, however painfully conscious we may be of 
the evils of our plight. The acuteness of our situation, and 
the suddenness of our reaction from our earlier optimism 
and credulity, probably constitute the best single explana- 
tion of the violence and uncertainty of the social, political, 
and legal revolution through which we are now passing. 

1, Public Inspection of Goods. — In repealing the old laws 
for the inspection of wares, it was claimed that under the 
free play of self-interest in competition, cheating would not 
pay and would therefore cure itself. Needless to say, these 
hopes were never realized. Men might perhaps be safely 
left to pursue their own interest in buying goods if they knew 
enough to do so, but as a matter of fact they do not. In- 
deed, it was far easier to assure oneself of the quality of 
one's purchases in the old days when the goods were of less 
variety, were more simple in their character, and were made 
by craftsmen who were not remote from the purchaser. But 
who in our day can tell the quality of baking-powder, of 
ground spices, or of a thousand and one things that are 
subject to adulteration? How many can distinguish butter 
from oleomargarine? How many can detect fever germs in 
water or trichinae in pork? For all these and many other 
things the ordinary buyer's knowledge is worthless : an 
expert must be employed. And what guarantees of honest 
wares are offered by modern commerce, in which it is some- 
times open to question whether greater profits can be realized 
by following the principle that " a satisfied customer is 
our best advertiser " or by unscrupulous reliance on easy 
methods of gulling the public ? Such questioning has been 
justified by the experience of the English people, and their 
law now provides for the inspection by government experts 
of meat and fish, groceries, drugs, butter, and other articles 



THE INDUSTRIAL STAGE IN ENGLAND 69 

of food. Gold plate and silver plate, gun barrels, steam 
boilers, drains and sewers, gas, weights and measures, — 
all these are tested on the same general principle that the 
government through experts must guard the people from 
those serious dangers against which they cannot or habit- 
ually do not protect themselves. In reality, men do of 
course in this case protect themselves, but they do so through 
their government, which represents their cooperative effort, 
rather than each man for himself. For every man to attempt 
to do everything directly for himself would be to return to 
barbarism. Division of labor and cooperation are causes 
and signs of advancing civilization. 

2. Social Protection of Labor. — Nowhere was . freedom 
more absolutely demanded at the time of the Industrial 
Revolution than for labor, and nowhere was it more needed. 
The old restrictions were galling and burdensome alike tc 
masters and men. But what of the freedom that took their 
place ? When machinery was introduced, it became possible 
to employ women and children in work that had formerly 
required the labor of men. But modern machinery is as 
destructive of life as a cannon if human life gets in its 
way ; and the destruction of life and limb in the early days 
of machinery was appalling. Here again it had been ingen- 
iously argued that self-interest would lead employers to 
protect their employees from injury of every kind. Thfc 
basis of the argument was of course the assumption that 
such protection would be to the benefit of the employers. 
But this assumption is not valid. 

So scandalous w^as the neglect of the early manufacturers 
that a reaction set in against the old license, and laws were 
passed requiring under heavy penalties what the simplest 
dictates of humanity ought to have secured and would have 
secured if men had been fit to be left, to unregulated competi- 



70 ELEMENTARY PRINCIPLES OF ECONOMICS 

tion. The employment of children fom* and five years of 
age, bad ventilation in factories, working over hours, neglect 
of children's education, and many other evils, called for a 
like interference. 

The result of a public recognition of these evils was a 
series of Acts of Parliament, known as the Factory Acts, 
beginning with that of 1802 and running down to the pres- 
ent time. Laws now in force provide, among other things, 
for: (1) the fencing in of all dangerous machinery; (2) 
ventilation and other sanitary conditions in factories; (3) 
a ten-hour working day for women, " young persons," and 
children, in most industries; (4) a Saturday half holiday 
for women, " young persons," and children; (5) prohibition 
of employment of any persons under eleven years of age, — • 
or of persons under sixteen, unless they present a certificate 
of fitness; (6) schooling for children half of each day or 
full hours on alternate days ; (7) the keeping of a register 
by employers in which they must enter all children under 
16 to whom they give out work, thus giving opportunity to 
inspectors to inspect the places where such work is done; 
(8) government inspectors to see to the enforcement of the 
law. This last provision has been found by experience to 
be one without which the rest of the legislation might as 
well not have been passed. In contrast with the provision 
which limits the work of women and children to not more 
than ten hours per day, place the old law of apprenticeship 
by which a boy must work at least from five in the morning 
till between seven and eight at night, with time off for 
meals. The change is significant as showing that whereas 
the old laws were framed in the interest of employers, 
modern ones have been designed in the interest of employees, 
or, to consider it more broadly, in the permanent interest of 
the people as a whole. 



THE INDUSTRIAL STAGE IN ENGLAND 71 

3. Trade-unions and the Government. — As the wage sys- 
tem developed during the Industrial Revolution there was a 
natural tendency for the wage-earners to group themselves 
by trades into unions for the protection of their interests. 
So jealous were the ruling classes, and so fearful lest the lower 
classes, who greatly outnumbered them, might by combining 
abate their power, that they had passed laws against such 
combinations at intervals ever since 1360. Hence, when the 
wage-earners found the need of union rapidly increasing, they 
were driven to secret organization for lack of the open 
methods which were denied them. In 1800, Parliament, 
finding that, in spite of the law, unions were steadily gaining 
in strength and numbers, passed a comprehensive law to 
suppress them, even declaring illegal " all agreements be- 
tween journeymen and workmen for obtaining advances 
of wages, reduction of hours of labor, or any other changes 
in the conditions of work." 

So odious did this law become that employers sometimes 
voluntarily pledged themselves not to have recourse to it. 
In 1824, after a prolonged agitation led by Francis Place, 
who at first received less support than might have been 
expected. Parliament confessed the law a mistake, and at 
the same time repealed earlier laws relating to combinations 
of workmen. Thus freed from outlawry, trade-unions 
grew at an astounding rate. But they were still subject 
to legal persecution of one sort or another. Especially 
did they suffer at the hands of the courts from adverse deci- 
sions which declared their united efforts to advance their 
interests conspiracies " in restraint of trade." In 1875> a 
law was passed which expressly declared that the purposes 
and actions of trade-unions were not to be held unlawful on 
the ground that they were in restraint of trade, and in the 
second place, that acts which are lawful when done by one 



72 ELEMENTARY PRINCIPLES OF ECONOMICS 

person shall be held lawful even when done by two or more 
conjointly, if such acts are in furtherance of an object sought 
through a trade dispute. Finally, in 1906, The Hudson 
Trades Dispute Act conferred still further immunities and 
privileges upon trade-unions in the matter of strikes, boy- 
cotts, and picketing. 

Moreover, during recent years England has introduced 
sickness and accident insurance, old-age pensions, minimum 
wage regulations in " sweated " trades, to mention only a 
few features of her provision for the welfare of the working 
classes. 

Conclusion. — We have pointed out a few of the many ways 
in which the new theory failed to justify itself when applied 
to the new economic power. The new power was that which 
created the revolution. The new theory was that which 
asserted the universal efficacy and beneficence of unrestrained 
industrial freedom, or unregulated competition. The theory 
and the power were alike strange to men. The new theory 
promised an immense increase in the product of national 
industry and a just distribution of the product among those 
who contributed to its making. An immense increase of 
product there was, though this was due to inventions and 
to enlarged markets as well as to competition. But the 
theory failed to fulfill its promise as to the distribution of 
the new wealth. Not until benevolence was standardized 
and enforced by legislation was the situation in this respect 
endurable. The reaction against the theory was not sudden, 
nor was it a conscious and definite revolt at all. The essen- 
tially practical and concrete habit of mind of the English 
people has become proverbial. They had been driven into 
the temporary acceptance of unregulated competition by 
the great changes in industry. When weakness in the ac- 
tion of that principle became manifest, they simply changed 



THE INDUSTRIAL STAGE IN ENGLAND 73 

its action little by little by applying the regulative power of 
society. And when the nineteenth century had passed, it 
was found that the good in the competitive principle had 
been retained, while the principle in its universal form had 
ceased to command assent. When, therefore, we hear the 
principle of a " fair field and no favor " and " no state inter- 
vention "advocated by a man strong in the consciousness of 
personal advantages, — for such he is likely to be, — we 
may know that he is a full century behind his time, and 
that he has not read or has not profited by one of the most 
impressive chapters of human history. For the English 
nation to-day, after a fair trial of free competition without 
interference by organized society, has undeniably returned 
to the principle of collective action which she had sought to 
abandon. Bitter experience has taught her that it is among 
the true functions of society to protect its citizens and 
to further their material and social well-being by every law 
and every activity which can contribute to that end. 

SUMMARY 

1. In 1760 agriculture was still priinitive, manufacture was in the 

handicraft stage, and there was much restrictive legislation. 

2. After 1760 there was a revolution in the system of landholding 

and landworldng, transportation was revolutionized, and the 
factory system was developed. 

3. The Industrial Revolution produced great social confusion, 

immoral competition, and violent fluctuations in trade. 

4. A reaction against the old absence of restraint has made itself 

increasingly manifest in the years that have followed, and es- 
pecially during the last quarter of a century. 

QUESTIONS FOR RECITATION 

1. How was production carried on before 1760? What was the 

nature of the markets? 

2. What changes in social organization resulted from the Industrial 

Revolution ? 



74 ELEMENTARY PRINCIPLES OF ECONOMICS 

3. Describe the struggle of labor unions for existence and for legal 

recognition. 

4. Who was Adam Smith? What was his significance as a voice 

of the time? 

5. Discuss the question of the passive policy of government. 

QUESTIONS FOR STUDY AND DISCUSSION 

1. Do you see any resemblance between the eighteenth century 

struggle of the handworker against the factory and the 
present-day struggle of the village storekeeper against the 
"mail order" department store? 

2. If workers in the nineteenth and twentieth centuries have won 

stupendous victories from public opinion and from law- 
makers, does the fact suggest anything as to the future of 
the labor movement? 

LITERATURE 

Cunningham, W. : The Growth of English Industry and Commerce, 

Vol. II, Bk. VIII, Pt. II. 
Gibbins, H. de B. : Industry in England, p. 204 (revised edition). 
Hammond, J. L., and B. : The Village Laborer, 1760-1832. 
Hobson, J. A. : The Evolution of Modern Capitalism, Chs. II and IV. 
Hone, N. J. : The Manor and Manorial Records. 
Hutchins, B. L., and Harrison, A. : A History of Factory Legislation 

(in England). 
Innes, A. D. : England's Industrial Development. 
Price, L. L. : A Short History of English Commerce and Industry, 

pp. 184-192, 192-201, 210-217. 
Prothero, R. E. : English Farming, Past and Present. 
Report of the United States Industrial Commission, Vol. XVI, on 

Foreign Labor Laws. 
Toynbee, Arnold : The Industrial Revolution, Ch. IV, pp. 46-57. 
Webb, Beatrice (Potter) : The Case for the Factory Acts. 



CHAPTER V 

THE INDUSTRIAL STAGE IN THE UNITED STATES 

I. The Industrial Revolution in the United States 
AND England Contrasted 

The story of the Industrial Revolution and of the indus- 
trial stage in England is in great part the story of the rev- 
olution and the stage in all countries that have gone 
through it. In studying the economic history of the United 
States for the same period, it is therefore unnecessary that 
we should enter again into all the details that go to make up 
the great movement. But as no two countries have the 
same racial and physical peculiarities, so no two countries 
are affected in precisely the same way by great industrial 
changes. The economic history of the United States is, 
in part, the history of the attempt to apply the principles of 
free competition and a minimum of state interference to a 
new country instead of to an old one, as was the case with 
the English experiment. This difference is so great as to 
have modified the result materially, and it will therefore be 
profitable to study these differences more particularly. 

The principle of non-intervention was adopted in our own 
country even more fully than in England, where the state 
never ceased to exercise a close supervision and control over 
many life interests, including religion. In some respects 
the results in the two countries have been parallel, in others 
not. At first sight it may seem that American experience 

75 



76 ELEMENTARY PRINCIPLES OF ECONOMICS 

does not so sharply condemn the passive pohcy of govern- 
ment as does that of England, and the question may be asked 
whether our conclusion from the history of English indus- 
trialism was after all correct? Which of the two countries 
has given the principle of unregulated competition the fairer 
test? 

It will be remembered that the suffering which attended 
the Industrial Revolution in England was of two kinds and 
from two different sources. One was due to the rapidity and 
magnitude of the industrial change ; the other was due, not 
to the change, but to the manner in which the change was 
effected, and to the system under which the new industry was 
carried on. In other words, one was due to change, the 
other to unregulated competition. It is necessary to keep 
these two causes distinct, if we are to reach a just conclu- 
sion regarding the influence of unrestrained competition 
upon industrial life. 

1. Comparative Difficulty of Transition. — We have al- 
ready seen how difficult was the transition from the old to 
the new order in England. In our own country, the diffi- 
culty was slight, or perhaps we might more properly say that 
there was no transition, since, when the Industrial Revolu- 
tion began, there was in America almost no manufacturing 
at all. Our industries were scarcely started when the spin- 
ning-jenny, the power loom, and the steam engine were 
introduced, and so almost from the beginning the factory 
system seemed the natural one. Such change as there was 
from hapd industries to power manufacture produced results 
similar to those witnessed in England ; but the change 
with us was so insignificant in extent as scarcely to attract 
public attention. Moreover, artisans who were thrown out 
of work had greater opportunities, and, on account of the 
less fixed conditions of life, were more ready to get new em- 



THE INDUSTRIAL STAGE IN THE UNITED STATES 77 

ployment in the growing industries of the time. Thus, the 
change which in England was a revolution was in America 
an evolution, a process of construction with Httle destruction, 
since there was httle to destroy. 

2. Comparative Difficulty in Operation of Competition. — 
Under the system of unrestrained competition, the English 
workmen played a continually losing game ; such was not the 
case with their American cousins. Just as the smallness 
of our industries at the beginning of the Industrial Revo- 
lution mitigated the sufferings from the change, so the 
greatness of our territory mitigated the sufferings from the 
system of competition. The average American does not 
realize adequately the difference between Americans and 
Europeans in their readiness to move about from place to 
place, a difference due in part to the fact that all those now 
in our country are either immigrants from other countries 
or the descendants of immigrants of a comparatively recent 
time. A comparison of census figures of our country with 
those of European countries shows that with them the 
proportion of persons living in town or country other than 
that of their birth is slight, while with us it is very great. 
Thus the census of 1880 disclosed the fact that only one- 
half of the native born inhabitants of the country were 
living in the country of their birth, and this despite the 
fact that a large proportion of the total population is made 
up of children, who, of course, would generally be living 
in the country of birth. Similarly, the census of 1900 shows 
that nearly thirty-two per cent of the total population of 
thecountry were living in states other than those of their birth. 
In 1910, as shown by the thirteenth census, 14.7 per cent 
of the whole population were foreign born, and 21.7 per cent 
of the remainder — or 18.5 per cent of the whole popula- 
tion — were living in states other than that of their birth. 



78 ELEMENTARY PRINCIPLES OF ECONOMICS 

a total of 33.2 per cent. Moreover, throughout our history, 
until within recent years, the American workman has always 
been able to secure cheap or even free land where he could 
earn an independent living. Under these two conditions of 
ready migration and easy access to independent proprietor- 
ship, it was impossible for the downward pressure of competi- 
tion to work out such results in manufacturing industry as 
must show themselves when no counteracting influence is 
opposed. Indeed, we may say that competition in America 
was regulated from the beginning, not by legislation, but by 
those great industrial forces and opportunities which we have 
just mentioned. 

But this influence could not be exerted forever. Our 
territorial resources, great as they are, have their limits. 
The American " frontier " has disappeared forever. We 
have already reached the parting of the ways. Henceforth 
our reliance must be placed upon some other agency than the 
free bounty of nature. As free land has become less and 
less abundant, the wage-earners of the East have had forced 
upon them conditions of life that have kept down, where 
they have not absolutely lowered, their standard of life. 
Extremes of wealth and alienation of social classes have 
become so great as to arouse the apprehension of all thought- 
ful men. Labor riots that call for military interference, 
such as those at Lawrence, Massachusetts, and in many parts 
of Colorado, testify to the fact that we have not escaped, 
that in the future we can hope less and less to escape, the 
friction- that accompanies all unfraternal relations among 
men. We have been greatly blest in that we have escaped 
the worst results so long. 

Concentration and Integration of Modem Industry. — 
Thus far we have been considering the effects of competition 
chiefly upon the employees, and in tracing these effects the 



THE INDUSTRIAL STAGE IN THE UNITED STATES 79 

history of England has been particularly instructive. When, 
however, we turn to the results of such competition in the 
case of employers, we find that our own country offers the 
most striking illustrations. Owing to the peculiar circum- 
stances of our situation, the results of competition among 
employers have developed more rapidly here than abroad. 
Though repeated conflicts with their workmen have led to 
a certain feeling of common interest in the matter of labor, 
and even to frequent combinations for mutual defense against 
the demands of employees, yet on the other hand the princi- 
ple of competition has until recently made them almost 
Ishmaelites in their business relations with one another. 
Those resources to which we have referred as mitigating 
the suffering of employees have not in the same way been 
available to the employers. Tied down to their large in- 
vestments of fixed capital, they have too often been com- 
pelled to stand and fight out to the end this war without 
quarter. In every such warfare the number of combatants 
tends to decrease. As old rivals are killed off, the successful 
survivors acquire greater skill and greater power in the 
conflict. With the passage of time greater and greater 
equipment is required to give any hope of a successful 
struggle. There are industries in which no such concen- 
tration has taken place, but for a great and apparently 
growing number of industries our description holds true. 
Thus, in spite of the enormous growth of our industries and 
population, the relative number of competitors in many 
industries has of late shown noticeable decrease. We cite 
but one instance, and that not the most striking, from the 
twelfth and thirteenth censuses of the United States. In the 
report of the twelfth census, occurs the following : " The 
present tendency toward large industries under one manage- 
ment is illustrated in the statistics of coke production in 



80 ELEMENTARY PRINCIPLES OF ECONOMICS 

1899. The total amount of coke produced has increased 
96.2 per cent, and the value of all products " (including by- 
products) "has increased 115.7 per cent, while the number 
of active establishments reporting for 1899 was only 23 
(or 10.6 per cent) more than the number reporting for 1889." 
From the thirteenth census it appears that the amount of 
coke produced increased 100.5 per cent from 1899 to 1909 ; 
the value of all products in the industry, 156.9 per cent; 
and the capital employed, 317 per cent ; whereas the number 
of establishments reporting increased by only 30.7 per cent. 
This is typical of what is taking place in an increasing 
number of industries. 

Competition of small producers attained its maximum in 
the decade between 1870 and 1880, when it became familiarly 
known as " cut-tliroat " competition. But for the existence 
of free land, undeveloped resources, and the constant in- 
crease of inventions, widespread disaster must have resulted. 
Since that time the relative number, and in some cases the 
absolute number, of competitors has decreased in a consider- 
able part of the industrial field. In the thirteenth census of 
manufactures, for 1909, a classification of establishments is 
made on the basis of the reported value of their annual 
product. It appears that 43.8 per cent of the value of all 
manufactures was produced in establishments of the highest 
class, each reporting $1,000,000 or more a year; and that 
82.2 per cent was similarly produced in the two highest 
classes, each reporting an annual product of $100,000 or more 
a year. - In the same way, 30.5 per cent of all employees re- 
ported in manufactures were employed in establishments of 
the highest class, and 74.3 per cent by the two highest classes 
combined. And both the highest class and the two highest 
classes combined show increased percentages for 1909 over 
1904, both for value of product and for number of employees. 



THE INDUSTRIAL STAGE IN THE UNITED STATES 81 

In the years from 1898 — which marked the close of the 
severe industrial depression that had lasted from 1893 — 
to 1907, the tendency to concentration became most marked, 
many of our greatest industrial combinations dating from 
this period. At the same time, and undoubtedly as a 
result, there occurred an interesting change in the philos- 
ophy of American business men. Before, they had all given 
unquestioning allegiance to the inspiring principle that 
" competition is the life of trade." With the organization 
of the " billion-dollar steel corporation " and other mammoths 
of th^ same class, there came an about-face, and in recent 
years many great industrial managers have vied with the 
socialists in insisting that not competition, but combina- 
tion or cooperation, is the life of trade. We shall have 
occasion later to consider the measure of truth in this claim ; 
here we are concerned only to note the origin of this in- 
teresting change in business philosophy. 

Recently the movement toward large-scale industry has 
taken on another phase. In addition to concentration of 
industry, we are now having a rapidly increasing integra- 
tion of industry. Large business concerns are finding it 
profitable to carry on, under one management, several 
stages of production that formerly represented separate 
industries, and also in many cases other closely related indus- 
tries. Thus the Standard Oil Company is a great producer 
of crude oil ; carries most of the "crude" of the country to 
refineries through its own pipe lines ; makes its own auxiliary 
materials and aids to marketing, such as sulphuric acid, 
boxes, barrels, cans, etc. ; produces a thousand and one sorts 
of kerosene, gasolene, lubricating oils, paraffin, asphalt, etc. ; 
and carries its own finished products to home and foreign 
markets through its own agencies of distribution, including 
a great fleet of tank steamers. 



82 ELEMENTARY PRINCIPLES OF ECONOMICS 

Monopolies. — Concentration of industry may be incom- 
plete or complete. Incomplete concentration resulting from 
combination may not lessen competition at all; it may even 
increase the sharpness and bitterness of the competition. It 
simply gives business into the hands of those producers who 
are best able to continue it under the vigorous conditions 
which existing competition imposes upon the rivals. But 
when concentration in any industry is complete, we have the 
entire industry under the management of a single individual, 
partnership, or corporation. When such a state of things 
exists, or is so nearly approached that a single unified manage- 
ment can exercise control over the supply, and hence over 
the price, of the product, we have a monopoly. 

We might naturally expect that where the tendency to 
concentration is strongest, as in the United States, the 
tendency to complete concentration, or monopoly, would 
also be strongest, and American experience would seem to 
justify the expectation. Thus two of the great problems 
now before the people of our country are those connected 
with the concentration and integration of industry, which 
leads to the so-called trusts, and with the complete con- 
centration of an industry, which is monopoly. It is partic- 
ularly in the class of so-called natural monopolies that the 
development has in recent times been most rapid and most 
startling. Natural monopolies are those that rest, not upon 
the will of society, but upon the economic characteristics of 
the business itself. Such, for instance, are all the monopolies 
of transportation and communication. The reason for the 
unusual development of the monopoly problem in our own 
time lies in the fact that the whole transport system of the 
world has been developed within little more than fifty years. 



THE INDUSTRIAL STAGE IN THE UNITED STATES 83 



II. Social Regulation of Competition in the United 

States 

Labor Legislation in the United States. — We have al- 
ready noted and explained the fact that the misery and 
degradation of the wage-earning classes, which in England 
led to a reaction in favor of an active policy of government, 
were not felt so quickly nor so keenly in the United States. 
With us, therefore, there was in earlier days no urgent de- 
mand for legislation in behalf of the workers. Similar condi- 
tions, however, led in the end to like results, and in most of 
the commonwealths of the American Union we now have a 
considerable body of factory legislation for the protection of 
the wage-earners and for the promotion of their welfare. 
Massachusetts, among the foremost of the states in the 
extent of her manufacturing interests, was naturally among 
the earliest to pass labor laws. The spread of such legis- 
lation in our country illustrates the principles which we 
have already explained, for in general it has followed the 
line of industrial development as it spread from New England 
to the West and South. 

Within recent years, however, state pride and a quickened 
social sense have led many relatively non-industrial states 
to imitate the labor codes of their industrial neighbors, 
and a gratifying advance has marked the opening years of 
the twentieth century. Even so, however, the American 
student of the social problem has sadly to admit that we 
have become laggards in the forward march of nations 
towards a higher and more humane civilization; that our 
once boasted leadership has passed from us to other lands. 
While our great economic resources still tempt labor as 
well as capital from abroad, the enticement of the lure is 



84 ELEMENTARY PRINCIPLES OF ECONOMICS 

weakened for labor, as it is strengthened for capital, by our 
inadequate attention to the welfare of our workers. 

Especially backward in the matter of labor laws are 
several of the Southern states, in which capital from the 
northeastern part of the country, and particularly from 
New England, has been largely invested during the last 
quarter century. It is found that all those states, which 
to a certain extent compete with Massachusetts and 
other New England states in textile manufactures, repeat 
many of the darkest pages of early English experience. 
While they are possibly gaining a temporary industrial 
advantage over the older state, public opinion is rapidly 
organizing to protest against a temporary industrial ad- 
vantage gained at the cost of the permanent welfare of 
the workmen of the South as well as of Massachusetts. True, 
some of the advantages possessed by the Southern states are 
derived from climate, proximity to raw material, the absence 
of antiquated machinery, etc. If, with good labor laws 
well enforced, these advantages are not offset by the better 
labor market of Massachusetts, her greater accumulation 
of specialized capital, with lower interest charges, her lower 
freight charges, her nearness to the consumers' markets, her 
helpful traditions of production, etc., the new states will 
confer a benefit upon society by producing the goods, even 
though it be at a serious temporary cost to the old New 
England state. Notwithstanding many peculiar difficulties, 
the South has already begun to follow England and Massa- 
chusetts in regarding higher and more permanent interests 
than the mere increase of output, and this movement must 
continue. 

But apart from state legislation we are to be assisted by 
federal legislation, if the new Federal Child Labor Act, 
signed by President Wilson on September 1, 1916, is finally 



THE INDUSTRIAL STAGE IN THE UNITED STATES 85 

sustained as constitutional by our courts and is properly en- 
forced. This law, hailed as a new Emancipation Proclama- 
tion, prohibits the shipment in interstate commerce of the 
products of mines, quarries, shops, factories, and canneries in 
which child labor is employed contrary to the provisions of the 
Federal Child Labor Act. These provisions are that chil- 
dren under sixteen years of age shall not be employed in 
mines and quarries, that children under fourteen years of 
age shall not be employed in shops, factories, and canneries, 
and that between the ages of fourteen and sixteen they shall 
not be employed at night nor for more than eight hours a 
day. This law is epoch-making in the history of social 
legislation in the United States. 

Legislation against Adulteration. — America and England 
have also differed in their readiness to give heed to the 
adulteration of goods and the falsification of wares. And 
yet we have certainly had need of some action in these 
matters. Not only have we become painfully familiar with 
goods of the sort that unrestrained competition always pro- 
duces, and that are known in England by the expressive 
term " cheap and nasty," but we have also with us, as 
commonly as anywhere else in the world, adulterations that 
menace life and health. The fact that the theory of non- 
interference has never been so completely shattered here as 
in England by the pressure of labor interests, coupled with 
the fact of the delicate balance of authority between state 
and Nation, probably accounts in considerable measure for 
our general reluctance to intrust to our government the 
duty of inspecting wares. Within the last few years more 
serious attention has been given to the matter, the Federal 
government and many states have moved rapidly and vigor- 
ously in the prevention of adulteration, and the growing 
interest in economic questions is likely to result in a better 
realization of our cooperative power and duty. 



86 ELEMENTARY PRINCIPLES OF ECONOMICS 

Social Control of Monopoly. — The question of the right 
relation of organized society to industry has nowhere proved 
more embarrassing and difficult than in the case of monop- 
ohes, and especially of the great class of monopolies which 
we have called natural. Here, even more than elsewhere, 
it has been brought home to men that the laissez-faire 
philosophy and practice cannot safely be accepted. The 
history of attempts to control these monopolies is long and 
confusing, but we may distinguish three fairly distinct 
methods : attempts to enforce competition, public control, 
and public ownership. 

1 . Attempts to Enforce Competition. — When the monopoly 
problem on a vast scale first presented itself, society was 
still possessed by the idea of the beneficence of the universal 
rule of self-interest. It was natural, therefore, to attempt 
to enforce competition in the new field of industry. Rail- 
way charters and charters for municipal service corporations 
were granted freely, even recklessly, in the belief that compe- 
tition would thus be secured. But competition cannot exist 
where monopoly is natural, as will be explained in a later 
chapter. The whole history of attempts to secure such 
competition is a history of failure. A single illustration may 
serve our purpose. The state of New York gave a railway 
charter to the West Shore Company, which constructed a 
line parallel to that of the New York Central. In granting 
the charter, the state attempted to enforce real and perma- 
nent competition by stipulating that the railway should 
never be sold to its rival. Yet after a few years of dis- 
astrous rate " wars," the new road was leased to the Central 
in 1885 for 475 years. The same experience has been re- 
peated, again and again, as often as the experiment has been 
tried. 

2. Public Control. — The second method of solving the 



THE INDUSTRIAL STAGE IN THE UNITED STATES 87 

social problem involved in natural monopolies is that of 
public control or regulation. This method began to be 
tried about fifty years ago with the rise of the " granger " 
movement, which was at first a mere unorganized uprising 
of farmers against railway abuses, but which later developed 
into an organized movement, having as its center the " Order 
of the Patrons of Husbandry," — commonly known as the 
" grangers," — founded in 1867. The political influence of 
this body forced many Middle Western states to pass laws 
regulating railway rates and binding the roads by other rules 
of action. Much of this legislation was so ill-considered that 
it was soon repealed, and the movement itself was thereby 
for a time discredited. But much of it was well founded, 
and a renewal of the effort resulted in the creation of state 
and federal railway commissions, with certain powers of 
supervision, adjudication, and control. The opening years 
of the twentieth century have witnessed a further advance 
in public regulation of public service monopolies. It is only 
a few years since Mr. Charles E, Hughes, ex-Justice of the 
United States Supreme Court, then Governor of New York 
State, after an unusually bitter struggle with the leaders of 
his party, succeeded in securing for his state the law creating 
Public Service Commissions and giving to them a really 
effective control. The example of New York State has 
been widely followed, and for the time being there is per- 
haps a more confident hope than ever before that society 
can solve the problem of monopoly through administrative 
control, while l^,ving ownership and management in private 
hands. 

This growing confidence in the possibility of regulation is 
reflected in the law passed by Congress in 1914, establishing 
a Federal Trade Commission, charged with the duty of 
regulating trusts, — or great industrial combinations, — 



88 ELEMENTARY PRINCIPLES OF ECONOMICS 

very much as the Interstate Commerce Commission and the 
various state PubHc Service Commissions have been charged 
with the duty of regulating railways and other public serv- 
ice monopolies. 

And yet it must be admitted that the policy of public 
control has hitherto proved difficult of application, not only 
in the case of railways, but also in the case of the large class 
of municipal natural monopolies. Wealthy corporations, 
retaining the best legal talent, have shown endless ingenuity 
in evasion, and great power in retaliation, as is abundantly 
shown in the annual reports of the United States Interstate 
Commerce Commission. 

3. Public Ownership. — The great difficulties in the way 
of successfully applying either of the first two methods have 
led a considerable proportion of our people to look with 
favor upon the method of public ownership of natural monop- 
olies, with or without government management of the busi- 
ness. In the case of municipal waterworks, the practice 
already obtains very generally. An increasing number 
of cities are taking into their own hands other forms of 
municipal service. Technical and political considerations 
make it quite possible that a given city may wisely own one 
form of municipal monopoly and at the same time refrain, 
with equal wisdom, from taking over others. This question 
will be further considered in a later chapter. At this point, 
therefore, we need only add in closing that the solution of the 
monopoly problem certainly lies to-day between the methods 
of public regulation and public ownership. 

SUMMARY 

1. In the United States, owing to the absence of established handi- 
crafts in the eighteenth century and to the abundance of 
free land, the transition to the industrial stage was not marked 
by great violence or suffering in the case of the workers. 



THE INDUSTRIAL STAGE IN THE UNITED STATES 89 

2. The intensity of competition in the United States has been 

felt more keenly by the manufacturers, and concentration 
of industry has thus been hastened. 

3. American experience confirms that of England in condemning 

unrestrained competition. 

4. The United States has found it necessary to give up the laissez- 

faire policy and to adopt a poUcy of social regulation of labor, 
monopoly, etc. 

5. The tendency to complete concentration of industry, or 

monopoly, gives rise to grave social problems. 

6. Three methods of solving the monopoly problem have been 

tried : enforced competition, public control, and public 
ownership. 

QUESTIONS FOR RECITATION 

1. Contrast the Industrial Revolution in the United States with 

the same change in England, (a) as regards the workers; 
(6) as regards employers. 

2. What has been the effect of the mobility of population in the 

United States? 

3. What is integration of industry? Complete concentration? 

Natural monopoly? 

4. Mention some of the ways in which the government in the 

United States regulates competition. 

5. Name and explain the different experiments in attempting to 

solve the monopoly problem. 

QUESTIONS FOR STUDY AND DISCUSSION 

1. Can you think of any economic, social, and poUtical conditions 

in the American colonies that would naturally give the laissez- 
faire philosophy an exceptionally strong position among the 
people of our country? 

2. Has the constitution (a) of the United States ; (b) of your state, 

any traces of the laissez-faire philosophy? 

3. Is the mobility of population likely to continue as great as it 

has been ? 

4. Is a tendency to concentration observable in agriculture in the 

United States ? in any other country ? in commerce ? in 
mining? If concentration should develop throughout the 
whole of industry, can you predict any probable political 
and social consequences ? 



90 ELEMENTARY PRINCIPLES OF ECONOMICS 

5. Wlien was the United States Steel Company incorporated? 
In what state ? What is its capitahzation ? Its annual 
earnings ? What illustrations does it afford of conoentrar 
tion? of integration? 

LITERATURE 

Bogart, E. L. : Economic History of the United States. 

Callender, G. S. : Selections from the Economic History of the United 

States. 
Coman, Katherine : The Industrial History of the United States. 
Ely, R. T. : Monopolies and Trusts, Ch. V, and The Evolution of 

Industrial Society, pp. 58-66. 
Jenks, J. W. : The Trust Problem. 
Johnson, E. R. : American Railway Transportation. 
King, W. I. : The Wealth and Income of the People of the United 

States. 
Van Hise, C. R. : Concentration and Control: A Solution of the 

Trust Problem in the United States. 
Wright, C. D. : The Industrial Evolution of the United States, 

Pt. II, Ch. XIV, pp. 174-189. 



BOOK III 

ECONOMIC THEORY 

PART I. CONSUMPTION 

CHAPTER I 

INTRODUCTORY 

Utilities and Goods 

We have studied the history of man's efforts to get a 
Hving, and the fundamental conditions which determine all 
his efforts to that end. We have now to study analytically 
the process by which he gets his living to-day, remembering 
that the process is conditioned fundamentally, and that those 
fundamental conditions have their roots far in the past. 

Reason for studjdng Consumption first. — When we in- 
quire why men display what we call economic activity, we 
discover at once that it is because they feel wants which they 
aim to satisfy. Most immediately connected with wants in 
any analysis of the subject is the satisfaction of them, and 
therefore it is not illogical to study first of all that branch of 
the subject which we have called by the name " consump- 
tion." 

Definitions. — When anything has the power of satisfying 
human wants, we say that it is a good thing, or that it 
possesses utility. In economics, these words " good " and 

91 



92 ELEMENTARY PRINCIPLES OF ECONOMICS. 

" utility " are also made to apply to the things or services 
themselves. To give a definition, therefore, we may say 
that a good or a utility is anything which can satisfy a human 
want. And here we must pause to caution the student that 
the word " good " is applied to any such thing even though 
the thing ministers to a want that were better left unsatisfied. 
The idea from the economic point of view is simply that the 
thing is good in the sense of being adapted to the want, how- 
ever reprehensible the want may be. Notice that this defi- 
nition of the term " good " includes not merely material 
things such as food and clothes, but also such immaterial 
things as personal services. The advice of a physician and a 
new invention are goods that we desire and are willing to pay 
for, though they do not exist in any physical form. Goods 
or utilities, then, may first be divided into the two great 
classes of (1) material things, and (2) personal services. In 
the last analysis, of course, all goods resolve themselves into 
" services," either of human beings, or of other material 
things. 

Free Goods and Economic Goods. — When we come to 
analyze goods further, we find that some of them are given 
by nature in such abundance that all of us may have our 
wants for them satisfied without effort. Thus, air is a 
utility of the first importance; but in all ordinary circum- 
stances it is so abundant that we can satisfy our wants for 
it without any exertion. All such goods are therefore called 
free goods. 

But we find by hard experience that before we can satisfy 
many of our wants, either we ourselves must make efforts, 
or others must exert themselves for us. The reason is that 
the supply of such utilities is limited either (1) by the im- 
possibility of increasing their number or amount at all, as is 
the case, for instance, with paintings by old masters, or 



UTILITIES AND GOODS 93 

(2) by the necessity of labor and sacrifice for further increase 
in their supply, as is the ease with watches and houses, and, 
indeed, with the greater number of things with which our 
economic Hfe is concerned. 

As just stated, these goods as a rule can be obtained only 
by human exertion or sacrifice. And being thus obtained, 
they can be exchanged or transferred from hand to hand 
by those who possess them. Of Course, many goods are 
of such a nature that they cannot be readily transferred 
or — as in the case of land — be actually transferred 
at all. In such cases, transfer of title takes the place of 
actual transfer of the goods. Again, it is of course impos- 
sible for one man to transfer to another any special ability 
that he may possess. But the services which such special 
ability may enable one to render may be exchanged for the 
services of others or for material goods, and we may regard 
such services as falling in the same class with the other goods 
we have been describing. All such goods we call economic 
goods, because they are the ones that man spends his life in 
acquiring, and because the wants for them and the efforts 
and sacrifices made in obtaining them are susceptible of such 
money measurement as enables them to be the subject of 
scientific analysis. The three characteristics of economic 
goods, then, are scarcity, cost, and exchangeability. To sum 
the matter up in the form of a definition : Economic goods 
are goods which are so limited in quantity that their possession, 
on the one hand, regidarly requires exertion or sacrifice, and, 
on the other hand, gives the oppoHunity of transferring or ex- 
changing them. 

When we speak of economic goods taken collectively or in a 
body, we use the word loealth, whether the mass of such goods 
be great or small. 

Different Sorts of Utility. — There are five ways in which 



94 ELEMENTARY PRINCIPLES OF ECONOMICS 

material goods can satisfy our wants. In the first place, a 
good satisfies our wants by reason of the elements or sub- 
stance of which it is composed. Thus, coal is so constituted 
that under certain conditions and in certain relations it pro- 
duces heat. This utility which a thing possesses by reason of 
the elements of tvhich it is composed we call (1) elementary 
utility. 

But the coal as it is in the mine is not ready to satisfy 
man's wants. It must first be broken up by the miner into 
such fragments as are convenient for man's purposes. Its 
form must be changed. This utility which a good has by 
reason of the form in tohich it exists we call (2) form utility. 
Manufacturing gives as its result form utilities, and we 
generally think of, manufactured products when we speak of 
this kind of utilities. 

When the coal has been changed by labor into a form 
fitted for human uses, it is still necessary to convey it to 
those who are to use it. The utility tvhich a good has by 
reason of being in a place convenient to tJie u^er we call (3) place 
utility. 

Next, this coal, which is made up of elements fitting it for 
human use, which has had its form changed by the miner, 
and which has now been transported to a place convenient 
for its consumption, is kept until the ti7ne when it is to be 
used. The utility ivhich a good has by reason of its being 
present at a time convenient to the consumer we call (4) time 
utility. 

Finally, by an act of exchange, the coal passes from the 
ownership or possession of the dealer to a consumer. The 
utility which a thing has by reason of being in the possession 
of one person rather than of another is called (5) possession 
utility. This may perhaps be better understood by consider- 
ing a " swap," an act of simple barter. When two boys swap 



UTILITIES AND GOODS 95 

jackknives, it is possible for both knives to have greater 
utiHty for their new owners than they had before. The new 
and added utihty resulting merely from change of possession 
is possession utility. 

Elementary utility, form utility, place utility, time utility, 
and possession utility : these, in their logical order, are all 
the sorts of utility that any material goods ever do or can 
have. Goods about to be consumed of course have all of 
these utilities ; but in the case of any particular commodity 
some one utility is likely to be of special importance. Thus, 
ice in summer has as its most conspicuous utility that of time. 
In the same way, great place utility is added to tea when it is 
carried from Japan or Ceylon to the consumer in an Ameri- 
can town. 

Wealth Consumption. — Man satisfies his wants by the 
enjoyment of these utilities. In many cases enjoyment of 
such utilities involves the destruction of the physical goods. 
But there are other things whose utilities are not destroyed 
by the user, but by natural forces. In such cases, the de- 
struction is usually gradual and slow. Thus, a house fur- 
nishes its utilities to the user over a long period of years. 
The direct satisfaction of human wants by the enjoyment of the 
utilities in goods is called consumption. When goods afford 
such direct satisfaction only in a single act of enjoyment, 
they are called perishable goods. Such, for instance, are coal 
and food. But a house, a book, or a carriage affords satis- 
faction of human wants in repeated acts of using. To take 
an extreme instance, land may be made to afford satisfaction 
of human wants through all time. These are durable goods. 
Defining, we may say that perishable goods are those that lose 
their utilities in a single satisfaction of human toants; durable 
goods are those that afford repeated satisfaction of human wants. 

Productive Consumption. — Earlier economists usually 



96 ELEMENTARY PRINCIPLES OF ECONOMICS 

included under the name consumption a destruction of utili- 
ties designed to result in the creation of new and greater 
utilities. Thus, coal, when used in the engines of a factory, 
was said to be consumed productively. If we were to call 
such consumption productive consumption, we should have to 
use some distinguishing word in referring to a destruction of 
utilities for the direct satisfaction of human wants. The ex- 
pression adopted for this purpose wa,s final consumption. But 
since productive consumption is only a part of the process of 
production, we may fairly confine the use of the word " con- 
sumption " to the final and immediate satisfaction of human 
wants by the enjoyment of the utilities afforded by goods. 
What economists once called productive consumption, there- 
fore, we shall call a part of production. 

Relation of Consumption to Production. — We must, for 
scientific reasons, mark somewhere a distinction between con- 
sumption and production, although, as appears above, the two 
often shade into each other. Consumption and production 
are correlative. Consumption furnishes the motive to pro- 
duction. Production affords materials and services for con- 
sumption. Consumption makes production necessary at the 
same time that it makes production possible. To sum up in 
a word, consumption is the end and condition of production, 
and of all economic activity; production is the means of 
consumption. 

SUMMARY 

1. Since want satisfaction forms the motive to all economic ac- 

tivity, consumption may properly be made the first division 
of economic theory. 

2. Want satisfiers are called utilities or goods. 

3. Free goods are unlimited in quantity and cost us nothing; 

economic goods require economic activity in their getting 
and using. 



UTILITIES AND GOODS 97 

4. There are five sorts of utility : elementary, form, place, time, 

and possession. 

5. Consumption is the use of goods in the direct satisfaction of 

human wants. 

6. Consumption is the end and means of production; production 

is the means of consumption. 

QUESTIONS FOR RECITATION 

1. Why is consumption first studied? 

2. What is a good or utility? Use each word in two sentences 

to show the difference between the technical economic use 
and the non-technical. 

3. Give illustrations of free goods ; of economic goods. 

4. Define elementary utiHty; form utility; place utiUty; time 

utility ; possession utility. 

QUESTIONS FOR STUDY AND DISCUSSION 

1. Is air ever an economic good? Sunshine? Is water ever a 

free good? 

2. Is the farmer the only producer? 

3. Is the name consumption to be applied to the use of corn in 

fattening hogs? Is the wearing out of a suit of clothes by 
a workman consumption or a part of the process of produc- 
tion? If workers are not consumers, who can be consumers? 

4. Give examples of elementary, form, place, time, and possession 

utihties. 

5. Give examples of perishable and of durable goods. 

LITERATURE 

Devine, E. T. : Economics, Ch. V, pp. 73-78. 
Fetter, F. A. : Principles of Economics. 
Patten, S. N. : The Consumption of Wealth. 



H 



CHAPTER II 
THE LAW OF DIMINISHING UTILITY 

Illustrations of the Law. — The wants of men are innu- 
merable and, considered as a whole, are never satisfied. 
There seems to be no limit to the variety of things desired. 
But if we single out any one commodity, we find that our 
desire for it is limited. We have all heard of the king who 
wanted gold and who got so much that he finally loathed the 
sight of it. The story of King Midas is but an illustration 
of what the economists call the law of diminishing utility or 
the laiv of satiable demand. Let us consider the case of a 
desert traveler, who, having long before exhausted his supply 
of water, comes upon an oasis with a cooling spring. The 
first cup of water may save his life, and would therefore have 
a utility which we may call absolute. A second cup may still 
have a very high degree of utility ; but if we suppose him to 
continue the drinking, we know that the later additions to 
his satisfaction will gradually grow less and that he cannot 
proceed without coming to a point where any further con- 
sumption will cause not pleasure but pain. 

This -is illustrated graphically by the figures on page 99. 

In the figure, let the equal spaces 1, 2, 3, 4, 5, 6, 7 on the 
line OX represent equal portions of water, and let the per- 
pendicular lines represent the height to which satisfaction 
rises in drinking the respective portions. Then the parallelo- 
grams would represent the total satisfaction derived from 

98 



THE LAW OF DIMINISHING UTILITY 



99 



the successive acts of consumption. It will be noticed that 
the first parallelogram is left open at the top. This is be- 
cause in the example the utility of the first cup 
a of water, since it saved life, is not susceptible of 
measurement. The line at the right, therefoie, 
5 is in such a case to be thought of as a 
continuing line rather than as terminating 
c at a. 

If now we think of the succes- 
sive portions — or increments — ■ 
® of the water as very small, 
— mouthfuls, for instance, 
■/ — ^our figure would 

g have to be 

L — redrawn as 

" X 2 3 4 5 6 7 8 „ ,, 

loUows : — ' 
Here, as before, the utility of the first water consumed is 
absolute, and therefore the curved line AB is represented 
as not touching the perpendicular OF in any point. 
The different increments consumed are to be thought 
of as points along the line OX, and the satisfaction 
derived from any increment, as m, is measured by 
a perpendicular, as mn, cutting the curve of 
diminishing utility. The curve in this case cuts 
the horizontal OX in the point B, repre- 
senting the point at which utility 
from the water ceases, and disu- 
i \ tility would begin should con- 
sumption continue. 

„ With the 



™ figures and ex- 

ample clearly in mind, let us now consider some of the particu- 
lars. Each unit of the commodity consumed is called an 



100 ELEMENTARY PRINCIPLES OF ECONOMICS 

increment of supply or an increment of consumption. The 
utility of the first unit, which in this case is absolute, is 
called the initial utility. If the stock be thought of as cut 
off at any point along the OX axis, the utility of the last unit 
is the marginal utility. Thus mn measures the marginal 
utility of stock Om. As consumption or stock increases along 
OX, marginal utility falls. Thus from the point of view of 
progressive acquisition or consumption of any good, we may 
define marginal utility as the utility of the last unit acquired 
or consumed. Instead of the term marginal utility, some 
writers use the term final utility, and others, effective 
utility. 

The total utility is the sum of the utilities of all the units of 
the stock. Note well, however, that the total utility is not the 
marginal utility multiplied by the number of units. It 
should rather be thought of as equal to the suffering or in- 
convenience that would be caused by withdrawing all the 
units one after the other. Precisely because of the facts 
summed up in the law of diminishing utility, total utility is 
always much greater than the marginal utility multiplied by 
the number of units. 

But the law we are studying is of wider application than 
to the mere case of consumption. It applies as well to 
possession. Whenever we have a stock of any commodity, 
we impute a utility to the commodity, even when we are not 
actually consuming it. The law applies therefore to the 
utility of the commodity whether we are consuming it or are 
retaining the power to consume it at some future time. Note, 
however, that in the case of possession, as compared with 
actual consumption, tJie marginal utility of any given stock 
will he the utility of any unit or increment of that particular 
stock, since the units or increments are to be regarded as 
physically indistinguishable. Thus the utility of any ton of 



THE LAW OF DIMINISHING UTILITY 101 

coal in my cellar is the same as that of any other ton in the 
same stock; but the utility of a ton in a stock of five tons is 
in any given circumstances greater than the utility of a ton 
in a stock of six tons or ten tons. 

Formal Statement of the Law. — We are now prepared for 
a formal statement of the important economic law of diminish- 
ing utility. It is as follows : At any given time the marginal 
utility of any commodity to its owner decreases with every in- 
crease in the stock possessed or consumed. 

Limitation.* — Notice that this statement of the law con- 
tains the qualification at any given time. The importance 
of this qualification becomes evident when we return to a 
consideration of our illustration. We know that when the 
utility of water has fallen to zero, it needs not long to wait 
before the satisfaction to be derived from consumption again 
becomes keen. With the consumption or possession of some 
things, the importance of the qualification becomes even 
greater. A boy finds that any clothing beyond a very small 
amount has a low added utility for him. But as he grows 
into young manhood, his wants change so far that a much 
larger supply of clothes has as great a marginal utility as his 
slender stock had before. Whenever different times are 
considered, therefore, we must make complete allowance for 
the change of wants in the interval. 

The Case of Money. — With this in mind, we may say 
that the law of diminishing utility applies to money as to all 
other goods, although the rate of diminishing utility is much 
slower, because money represents general purchasing power 
and permits variety in consumption. With variety in con- 
sumption, as we all know from experience, satiety is reached 
more slowly than without it. Nevertheless, at any given 
time, the hundredth dollar of one's stock has a lower 
utility than the ninety-ninth or any other preceding 



102 ELEMENTARY PRINCIPLES OF ECONOMICS 

one. Thus it follows that to a rich man, other things 
being equal, money has a less marginal utility than to a poor 
man. 

SUMMARY 

1. The law of diminisMng utility explains how increasing a stock 

of goods means decreasing the utility per unit of the stock. 

2. Initial utility is the utility of the first unit; marginal utility, 

the utility of the last unit, the stock being thought of as 
gradually increasing. 

3. The law of diminishing utility applies unquaUfiedly only at a 

particular moment of time. 

4. The law of diminishing utihty applies to money as to other 

commodities. 

QUESTIONS FOR RECITATION 

1. How great is the marginal utility of air under ordinary circum- 

stances ? Why ? 

2. How does the law of diminishing utility apply when the eon- 

sumption of commodities is carried beyond the point of zero 
utility? Illustrate by diagram. 

3. Give illustrations of the importance of the qualifying phrase 

"at any given time." 

4. What significance has the law as bearing upon the comparative 

condition of the rich and the poor? 



QUESTIONS FOR STUDY AND DISCUSSION 

1. Does the marginal utiHty of all commodities decrease at the 

same rate? Does the marginal utility of any commodity 
decrease at the same rate for aU persons? Give illustrations 
and draw diagrams to represent differences. 

2. Is the marginal utihty of a dollar necessarily less for any par- 

ticular rich man than for any particular poor man ? 

3. Distinguish between flowers and weeds in terms of the law of 

diminishing utility. Draw to represent the distinction. 

4. Can you think of any tales or proverbs that illustrate the sig- 

nificance of the law of diminishing utiUty? 



THE LAW OF DIMINISHING UTILITY 103 



LITERATURE 

See preceding chapter. Also : 

Clark, J. B. : Distribution of Wealth, Ch. XIV, pp. 209-213. 

Cunyinghame, H. H. : Geometrical Political Economy. 

Devine, E. T. : Economics, Ch. V, pp. 86-92. 

Marshall, A. : Principles of Economics, Bk. Ill, Ch. Ill, §§ 1-4. 



CHAPTER III 

DEMAND 

The Economic Order of Consumption. — It follows from 
the law of diminishing utility that men in satisfying their 
wants consume commodities in a fairly regular order. So 
far as they consume things to the best advantage, their con- 
sumption is*'based upon a balancing of these two considera- 
tions, — the utility of the goods, and the cost of procuring them. 
Therefore, in deciding what wants they will first satisfy, they 
will choose those commodities tvhich promise the greatest sur- 
plus of utility over cost. 

To make this clearer let xis take a detailed example. Suppose 
a boy with twenty-five cents to spend standing before a booth at 
a fair, and bent on satisfying a want for goods there displayed. 
If peanuts are five cents a pint, it may be that his hMng for them 
wiU be great enough to cause him to make a pint of them his first 
purchase. But he knows that a second pint wiU satisfy a want 
less keen than is satisfied by the first. We may imagine him, then, 
spending his second nickel on popcorn. In the same way, it may 
be, a first glass of lemonade will give him greater enjoyment than 
would a second pint of peanuts or a second bag of popcorn. It is 
possible that he has no strong desire for the other goods displayed, 
and that" he can get greater satisfaction from a second pint of 
peanuts than from anything else that he could purchase, although 
they will afford less enjoyment than he derives from either the 
popcorn or the lemonade he has bought. Again, it is quite possible 
that he will hke a second glass of lemonade better than a third 
pint of peanuts or even a second bag of popcorn, because the action 
of the law of diminishing utility is more rapid in his consumption 

104 



DEMAND 



105 



of popcorn than in his consumption of lemonade. Now the boy 
has purchased with his five nickels two pints of peanuts, one bag 
of popcorn, and two glasses of lemonade. The case is the same 
whether he buys them aU at the same time or distributes his pur- 
chases throughout an afternoon. He makes his purchases accord- 
ing to his judgment as to their varying utiUty in such a way that 
he will receive the maximum enjoyment from his expenditure. 

Illustration by Diagram. — • Let us illustrate this as before by a 
diagram : 



h-^g 



n 






-^i^ 




1 
1 

j 


1 


2 1 3 ;._4_^ 



Fig. 1 



Fig. 2 



.^.5' 



"~1 



I '■ " '-— " > 



4 ! 5 



JzJ=^'0' 



I 



I . 



4 r~5-T-6 



.X'" 



Fig. 3 



Fig. 4 



In these figures let successive units of the respective goods be 
measured by distance from on the OX axis. Let the parallelo- 
grams represent the satisfaction derived from the consumption of 
the different units. It wiU be noticed that the utiUty of the first 
unit is greatest in the first diagram, and that it becomes less in 
each succeeding figure, but that the utiUty diminishes more slowly 
in Figure 3 than in Figure 2. Now let the price of each unit be 



106 ELEMENTARY PRINCIPLES OF ECONOMICS 

measured by the distance between OX and ab in each figure, since 

this is the same in all cases. In the diagrams it is evident that 
purchase will first be made of the commodity represented in Figure 
1, since the surplus of satisfaction over cost is greatest in that 
case, this surplus being measured by the parallelogram as, which 
is larger than any of the corresponding parallelograms m, n, r, s. 
The parallelogram n, which represents the surplus of utility over 
cost of the first unit of the second commodity, — in our illustration, 
popcorn, — is greater than the parallelogram m, which represents 
the surplus of utility from a second unit of the first commod- 
ity, and is also greater than the parallelogram r, which repre- 
sents the surplus utility from a first unit of the third commodity, 
— in this case, lemonade. It will, therefore, represent the second 
purchase. In the same way r, being next in size, represents the 
third purchase ; m, the fourth ; and s, the fifth. Notice that 
while the first unit of the second commodity aiSords a surplus, the 
second does not. Again, notice Figure 4, which represents some 
commodity that the boy is not tempted to purchase with the stock 
of money in his possession. 

It will be interesting and valuable practice for the student to 
vary these figures to represent different suppositions regarding 
consumption, and to carry the process one step farther by suppos- 
ing the units of the commodity to be so small that the diminish- 
ing utiUty wiU be represented by a curved line instead of by the 
broken lines that form the top and part of the right side of the 
paraUelograms in our illustration. Another variation might well 
be to have the costs vary from commodity to commodity. 

We are now prepared for a formal statement of the law of 
the economic order of consumption. So far as commodities 
are pm-cliased and consumed rationally and economically, 
choice is in every case determined by the amount of the surplus 
of utility over cost. 

The Law of Substitution, Indifference, or Equi-Marginal 
Return. — To this law there is a corollary, which is also the 
application to the field of consumption of the more general 
economic law variously known as the law of substitution, of 
indifference, or of equi-marginal returns. As applied to con- 
sumption this law is that choice is determined by the desire to 



DEMAND 107 

make marginal utilities equal in all fields of consumption, reck- 
oning these marginal utilities with respect to a common unit of 
expenditure. Some goods, to be sure, are of such a charac- 
ter as to make any nice balancing of satisfaction difficult 
or impossible. There is so great a difference in the price of 
cameras and automobiles that I may satisfy my want for 
the one much more fully than my want for the other ; though 
even in this case it must be remembered that I can achieve 
a certain satisfaction of my want for automobiles without 
buying one outright. But in the case of most sorts of goods 
it is possible to buy greater or smaller quantities at will and 
at corresponding gradation of expenditure. And in the case 
of such goods it is obvious that rational expenditure will be 
so adjusted as to make the marginal utilities equal in all lines 
of consumption. 

How Economic Importance is determined. — Each con- 
sumer estimates the economic importance of any commodity, 
not upon the basis of its total utility, but upon the basis of 
its marginal utility. In other words, its importance is 
measured, not by the total amount of inconvenience or 
suffering that would result from entire deprivation of the 
given stock, but by the keenness of the desire or want that 
he would feel if deprived of any portion of the stock. If I 
were where I could not make any purchases of goods, nor 
add to my stock in any way for a considerable time, and if 
I had in addition to other goods fifty barrels of flour and only 
three pounds of sugar, I should probably husband the sugar 
more carefully than the flour. In other words, I should cal- 
culate that with the existing stocks a pound of sugar had a 
greater economic importance for me than a pound of flour. 
If, however, instead of the greater quantity of flour, I had 
so little that ordinary consumption would use it up before 
the stock could be replenished, I should attach the greater 



108 ELEMENTARY PRINCIPLES OF ECONOMICS 

economic importance to the flour instead of to the sugar. 
In either case my reason would be the same. In the first 
case sugar would have a greater marginal utility than flour, 
because diminution in its supply would leave me with an 
unsatisfied want keener than would follow from an equal 
diminution in the stock of flour. But in the second case 
the flour would have the greater marginal utility, since a 
decrease in its supply would involve actual hunger before 
the stock could be replenished. 

It is instructive to compare the relation between the mar- 
ginal utilities of two commodities with the relation between 
their total utilities. Thus, a pound of gold has a greater 
economic importance than a pound of iron, though the world 
would probably suffer more from the loss of all its iron than 
from the loss of all its gold. The same contrast is much 
more certainly and obviously true of diamonds and coal. 

The Laws of Demand 

We have already explained that the study of human wants 
is directly connected w^ith the study of consumption, and 
that the study of consumption leads to the study of demand. 
But we must note that a want for anything is not the same 
thing as a demand for it. " If wishes were horses, then 
beggars might ride." In order that there may be a demand 
for a thing, there must be not only a desire for it, but also 
the willingness and the ability to offer for it some sacrifice. 
In other- words, to speak in the language of everyday life, 
we must not simply want the thing, but we must want it 
enough to pay for it. It must be remembered, therefore, 
that in economics, demand means desire backed up by means 
or purchasing power. 

But in addition to this definition of the real meaning of 



DEMAND 109 

the word " demand " in economics, we need a definite way 
of measuring its intensity. Such a method of measurement 
is found in the number of units of any commodity which 
will be purchased at a given price. If a table be constructed 
of the different quantities of a commodity which would be 
purchased at different prices at any given time, such a table 
will describe what economists speak of as the state of demand 
for the commodity. If to-day the people of a certain com- 
munity are willing to buy 

100 bushels of apples at $2.00 per bushel, 
300 " " " " $1.00 " " , 
500 " " " " $0.75 " " , 

this list or table, we say, shows the present state of demand 

for apples in the community. 

The demand for a commodity is said to increase, and can 
only then properly be said to increase, when the quantity that 
loill be taken at a given price increases. There is perhaps no 
more frequent mistake in economic reasoning than that of 
assuming that demand for a commodity has increased or 
decreased because the commodity is actually selling at a 
higher or lower price than before. When the price rises, it 
may indeed be because of an increase of demand for the same 
quantity or flow of the commodity ; but on the other hand 
it may be because, with no change in demand, the quantity 
on the market, or the flow of commodity into the market, 
has lessened. From this it follows that there is a difference 
between demand and quantity demanded. 

It is usual in treatises on economics to include a statement 
of the law or laws of demand, substantially as they are given 
below. Strictly speaking, however, only the first and third 
are laws of demand, the second being rather a law of the 
quantity demanded, as has been explained above. 



110 ELEMENTARY PRINCIPLES OF ECONOMICS 

1 . The Quantity Demanded Varies Directly with the Marginal 
Utility. — Suppose, in the first place, that the price of a 

certain quahty of tea remains during a certain period at 
fifty cents the pound, and that during the same period the 
wealth of the consumers also remains the same. Then it is 
evident that if the public taste for any reason changes in 
such a way that the marginal utility of any amount or flow 
of tea becomes less or greater, the demand will fall off or in- 
crease to correspond. Note, however, that the change in 
demand is not necessarily, or even usually, exactly propor- 
tioned to the change in marginal utility. 

2. The Quantity Demanded Varies Inversely ivith the Price. 
— Again, suppose that the wealth of consumers remains the 
same, and that there is no change in the marginal utility of 
any quantity or flow of the commodity. Then it is evident 
that the amount taken will be greater when the price is low 
and smaller when the price rises. The relation between price 
changes and resulting changes in quantity demanded varies 
with different commodities. Thus, in the consumption of 
wheat, for instance, while it makes a difference in the quantity 
taken whether the price stands at fifty cents or at a dollar a 
bushel, the difference is not so great as in the case of articles 
that satisfy less urgent wants. On the other hand, a fall in 
the price of certain articles, especially luxuries, is promptly 
f cllov/ed by a great increase in the quantity taken from the 
market. 

The extent to which changes in price are attended by changes 
in quantity taken is known as the elasticity of demand. Thus, 
when a relatively slight fall in price residts in a relatively great 
increase in the quantity taken, demand is said to he highly 
elastic. The unit, or standard, of elasticity is represented by 
that condition in which the produM of quantity taken multiplied 
by the price per unit remains constant for different quantities 
and prices. The following table will illustrate : — 



DEMAND 



111 



Price peb Unit 


No. Units Taken 


Total Sales 


$2.00 

1.00 

.50 

.25 


200 

400 

800 

1600 


$400 
400 
400 
400 



When the product of quantity taken and price increases 
with a fall in price, the demand is said to be elastic ; when 
the product decreases, the demand is said to be inelastic. 
Otherwise defined, the unit of elasticity is that degree of elasticity 
in which any change in price is attended by a precisely equal 
proportionate but inverse change in the quantity taken, and 
mce versa. 

3. The Quantity Demanded Varies Directly with the General 
Wealth or Purchasing Power. — In the third place, if we sup- 
pose the marginal utility of any commodity and its price to 
remain the same, it is evident that anything which increases 
the purchasing power of the community will increase its de- 
mand for the commodity. For increase of wealth, as has 
been explained, lowers the marginal utility of money, and 
makes it possible to spend more for other commodities with- 
out losing that surplus of utility over cost which determines 
purchases. Here again, hovN^ever, it is to be noted that the 
change in purchasing power and the resulting change in 
demand are not of necessity equal in degree. 

The three general statements or laws just given and ex- 
plained may be summed up as follows : (1) Demand for any 
commodity varies directly, but not necessarily in proportion, 
(a) with the marginal utility of the commodity, and (b) with 
the purchasing power of the community; and (2) the quantity 
taken from the market varies inversely, but not necessarily in 
proportion, with the price. 



112 ELEMENTARY PRINCIPLES OF ECONOMICS 

Engel's Law of Family Expenditure. — Further light is 
thrown on the principles which we have been studying by 
the actual facts regarding the expenditures and consumption 
of families. A detailed statement of the income and outgo 
of a family is called a family budget. Careful studies of such 
budgets have been made in Saxony and Great Britain and in 
some of our own states, notably Massachusetts and Illinois. 
On the basis of the German statistics, the table of percent- 
ages on the following page has been prepared. 

Percentages of Family Expenditure. Saxony 



Items op Expenditure 



1. Subsistence . . 

2. Clothing . . . 

3. Lodging . . . 

4. Firing and lighting 

5. Education, public 

"worship, etc. . 

6. Legal protection . 

7. Care of health 

8. Comfort, mental and 

bodily recreation 
Total .... 



Peecentage of the Expendittjhe op the 
Family op 



A workingman 

with an income 

of from $225 to 

$300 a year. 



Per cent 



62.0 

16.0 

12.0 

5.0 

2.0 
1.0 
1.0 

1.0 



95.0 



5.0 



100.0 



A man of the 
intermediate 
class ("Mittel- 
standes") with 
an income of 
from $450 to 
$600 a year. 




90.0 



10.0 



100.0 



A person in easy 

circumstances 

("desWohl- 

standes ' ') with 

an income of from 

$750 to $1100 a 

year. 



Per cent 

50.0] 

18.0 

12.0 

5.0 



85.0 



5.5 
3.0 
3.0 

3.5 



15.0 



100.0 



The following table permits a comparison between the 
conditions obtaining in different countries : — 



DEMAND 



113 



Comparative Percentages op Expenditures by the Families 

OF WORKINGMEN IN ILLINOIS, MASSACHUSETTS, GrEAT BrITAIN, 

AND Saxony 



Items of Expenditubb 


Illinois 


Massa- 
chusetts 


Great 
Beitain 


Saxony 


Average 


Subsistence 
Clothing . . . 
Rent .... 

Fuel 

Sundries . . . 


41.38 
21.00 
17.42 
5.63 
14.57 
100.00 


49.28 
15.95 
19.74 
4.30 
10.73 


51.36 
18.12 
13.48 
3.50 
13.54 


55.00 
18.00 
12.00 
5.00 
10.00 


49.25 
18.27 
15.66 
4.61 
12.21 


Total . . . 


100.00 


100.00 


100.00 


100.00 



As a result of his study of Saxon family budgets, as already 
given, Dr. Ernst Engel, an eminent statistician, laid down 
the following general latv of family expenditure, or domestic 
consumption. 

As the income of a family increases, 

(1) The percentage of expenditure for food decreases; 

(2) The percentage of expenditure for clothing remains ap- 
proximately the same; 

(3) The percentage of expenditure for rent, fuel, and light is 
invariable; 

(4) The percentage of expenditure for education, health, 
recreation, etc., increases. 

From the figures given in the tables it is evident that the 
demand for food in any community has comparatively little 
elasticity, since enough for subsistence is required in any case, 
and the relative amount demanded by all classes falls off 
rapidly as these needs are satisfied. On the other hand, in- 
creased wealth results in an increasing demand for all the 
manifold goods and services that minister to cultural wants. 

Since the satisfaction of man's higher wants is necessary 



114 ELEMENTARY PRINCIPLES OF ECONOMICS 

to his complete efficiency as a producer, we can understand 
from the tables how it is that " the destruction of the poor 
is their poverty." They live in a vicious circle. The 
poverty to which they are born is itself the bar to their 
escape. Once free them from this condition, and the power 
to perpetuate their own prosperity is given into their hands ; 
for they thus become more efficient as producers and more 
skillful in securing a just share in the increased product of 
their labor. 

Engel's law is also of great value in illustrating the unfair 
social distribution of the burden imposed by ignorant or in- 
tentionally vicious tax laws. It is clear that a tax, say of 
one dollar a barrel on flour, however laid, is bound to throw 
an entirely disproportionate load upon the shoulders of the 
poor. Yet a consideration of existing systems of taxation 
can leave no one in doubt that such taxation is frequently 
the rule. 

SUMMARY 

1. Men seek in their consumption to secure the greatest possible 

surplus of utility over cost, and to maintain an equaUty of 
marginal utilities in their different Lines of expenditure. 

2. The economic importance of a commodity is determined by its 

marginal utility. 

3. Demand varies directly with marginal utility and with the 

wealth of the consumer : the quantity demanded varies in- 
versely with the price. 

4. Increase of income means increased opportunity for expendi- 

ture on the comforts and decencies of life. 

QUESTIONS FOR RECITATION 

1. Draw diagrams roughly representing the initial utility and the 

diminishing utiUty of some different kinds of consumption 
in your own case. 

2. Which has the greater economic importance for men, water 

or gold? Water or wheat? Contrast other commodities in 
the same way. 



DEMAND 115 

3. State the law or laws of demand. Give illustrations. 

4. State Engel's law of domestic expenditure. What is the bear- 

ing of the law on the condition of the poor? on taxation? 

QUESTIONS FOR STUDY AND DISCUSSION 

1. In what terms do we estimate marginal utiUties in everyday life ? 

2. What would be the relative effect upon demand for aiitomobiles 

and wheat if the prices of both should fall proportionally? 
Why has the price of copper remained high in spite of the 
great increase in its supply? How does the sudden death 
of a President affect the demand for mourning goods ? Why ? 

3. What percentages of their incomes do different persons in your 

community spend for the different kinds of things mentioned 
in Engel's law? 

4. Prepare tables of demand to show elasticity of more than unity ; 

of less than unity ; of unity. 

LITERATURE 

See preceding chapters. Also, on Engel's law: — ■ 

Roscher, W. : Principles of Political Economy (Translation), Vol. I, 

Ch. I, §§ 1-6. 
Rowntree, B. S. : Poverty : a Study of Town Life. 
The Enghsh Board of Trade Reports on the Cost of Living in 

England, France, and Germany. 
The Seventh Annual Report of the United States Commissioner of 

Labor gives the results of other investigations. 



CHAPTER IV 

THE ECONOMY OF SPENDING AND SAVING 

Two important questions regarding economy in consump- 
tion remain to be studied. The first question is, briefly, 
(1) Hotv can one's whole expenditure or consumption be so dis- 
tributed beticeen the present and the future that the greatest 
amount of satisfaction will result? The second question as- 
sumes that the first has been answered, and asks (2) how the 
consumption of the present may be so ordered that it ivill result 
in the greatest total of satisfaction. Though both questions 
really have to do with expenditure, still we commonly think 
of the first as the problem of saving, as distinguished from 
the problem of spending, which is represented in the second 
question. 

I. The Economy of Saving 

First of all it should be noted that the proportion between 
present and future expenditure conforms to the general rule 
which has already been laid down as the law of the " eco- 
nomic order of consumption." We seek always in our ex- 
penditure to secure the greatest surplus of utility over cost ; 
hence we discontinue present expenditure when we feel that 
we can secure a greater surplus of utility by applying any 
remainder of our purchasing power to future purchases. Of 
course, with many people the demands of the present are so 

116 



THE ECONOMY OF SPENDING AND SAVING 117 

urgent and their means so limited that there is little oppor- 
tunity for any such balancing of present and future surpluses. 
But whenever there is any saving at all, it proceeds according 
to the mental comparison just explained. 

1. Hoarding. — But how are goods saved? Manifestly, 
we may save goods in such a way that neither we ourselves 
nor others can enjoy them in the present. The peasants 
of some countries are so distrustful of banks that they lay 
by or Jioard their savings in secret places about their homes. 
Such saving, though it is not the best, is better than harm- 
ful or luxurious consumption in the present ; for if the good, 
for instance, money, be stored away in such a manner that 
it will not suffer harm, it may in the end minister to real 
and commendable wants. 

2. Investment. — But in modern times, with security of 
property guaranteed by a strong government, and with easy 
opportunities for devoting savings to productive uses that 
will return a regular income, most provident people prefer 
saving by investment to saving by hoarding. Such invest- 
ment may be (a) directly made in business or in income-produc- 
ing property. But as industry becomes more complicated 
and requires more and more skill for successful management, 
a greater number of people prefer to (b) invest indirectly, i.e., 
to intrust their savings to the hands of others rather than to in- 
vest them directly. The process is even carried one step 
farther in the majority of cases. Instead of lending their 
savings directly to those who manage productive enterprises, 
(c) men deposit their savings, in the form of money or credit 
instruments, in banks, and the banks in turn take it upon 
themselves to decide in what enterprises such savings may 
be most safely and profitably invested. 

The difference betw een hoarding and saving by investment 
is, briefly, that in the one case the goods may ultimately be 



118 ELEMENTARY PRINCIPLES OF ECONOMICS 

used productively and economically, while in the other case 
the goods saved are saved by being used thus productively. 

The Real Nature of Saving. — The fact that money repre- 
sents goods in general is likely to cause us to overlook the 
real nature of saving. From the individual point of view, 
saving means the postponement of consumption. When a 
man saves five dollars out of his week's income, he is post- 
poning to a future time the exercise of his right to receive 
goods to that amount from his fellows. He may do this 
either by hoarding the money or by lending it to someone 
else. But such acts do not necessarily result in saving from 
the social point of view. Social saving means greater power 
of enjoynient in the future on the part of the community as a 
whole. If A lends to B money which B at once wastes, A 
individually has saved, but there has been no social saving, 
for there will not be more goods to enjoy in the future on 
account of this act. But if, instead of wasting the amount 
borrowed, B had paid it out for the making of a machine, 
there would also have been social saving, since the machine 
would make it possible to produce more goods in the future. 
Modern societies save chiefly by bettering their facilities for 
producing goods; the amount of food, clothing, etc., that 
the people of the United States store up for future use is 
comparatively small. 

The Make-work Fallacy. — We often hear men talldng 
as if the man who spends money freely were a public bene- 
factor, while the man who is not thus lavish is to be regarded 
with reproach. But it is plain from the foregoing that the 
former is using up goods and services now, while the latter 
may through his investments be improving the productive 
equipment of society. The one is telling men to serve him 
in his home, in his stables, and aboard his yacht ; the other 
is setting them to work building factories, — he is saving 



THE ECONOMY OF SPENDING AND SAVING 119 

socially. It is true, this may in its turn be pushed too far. 
We may make the mistake of spending all our time and effort 
in getting ready to live at some future day, when it would 
be wiser and better to spend some thought upon actual living. 
But perhaps neither individuals nor nations need such a 
warning. 

" Spending money to make trade good " is thus seen to be 
fallacious. 

II. The Economy of Spending 

Having considered the first of the two questions which 
were raised at the beginning of this chapter, we have next to 
consider the other, — the question of how to order one's 
present consumption that the greatest good may result. 

First of all, for economy in spending, two things are 
essential, which we may call (A) the economy of right choice, 
and (B) the economy of right use. The economy of right 
choice depends upon a correct hnoidedge of those present uses 
to which commodities may he most advantageously applied, 
while the economy of right use depends upon a knoivledge of 
the most efficient means of applying the goods to those uses. 

(A) The Economy of Right Choice. — In considering the 
question of how economy may be secured through right 
choice, we enter into a field of thought that forms the border- 
land between ethics and economics. First of ail, we are 
probably safe in asserting that from the point of view of society 
as a whole, economy requires that the results of social effort 
should, in the highest practicable degree, be distributed among 
the individuals in society. When many toil and go without 
the mere decencies of life in order that a few may be lapped 
in luxury without toil or care, it is evident that a fundamental 
rule of social economy is violated. Without discussing here 



120 ELEMENTARY PRINCIPLES OF ECONOMICS 

how far such a condition may be prevented, we may all 
agree that it does not represent an ideal of economy for a 
democratic society. 

The Waste of Luxury. — Expenditure for luxuries, or 
luxurious consumption, is not economical consumption, be- 
cause it does not adapt resources to their most advantageous 
uses. The subject of luxury is a difficult one to discuss, 
since a definition of the thing itself is by no means easy. 
Many things are to-day easily obtainable by the poorest 
which two centuries ago could be enjoyed only by the most 
wealthy and powerful. Such things are never thought of as 
luxuries in modern days, but if their possession in the olden 
time required the exploitation of the poor and did not render 
their possessors able and willing to confer great social service 
in return, we must hold that they were then luxuries. To 
the illiterate man, a library is a luxiu-y; to the scientist, it 
may be a necessity for complete efficiency. These illustra- 
tions may serve to show the difficulty of reaching any simple 
and clear definition of luxury, and the equally great difficulty 
of establishing any universal principles by which we may 
always judge such expenditure. Yet it is possible to lay 
down a definition which at the same time implies a principle 
of social economy in expenditure and suggests an ethical pre- 
cept : Luxury consists in any consumption of commodities and 
services which is seriously out of proportion to the service that 
it enables the consumer to return to society, but which is not of 
necessity directly injurious to the consumer. 

But, it may be asked, has not a man the right to do as he 
will with his own ? And the answer must be. Yes, in a very 
full measure, if you judge right solely by the statute law. 
No court had appointed Cain to the guardianship of Abel. 
But the statute law follows only slowly and haltingly after 
the growing sense of right and duty as it develops in the 



THE ECONOMY OF SPENDING AND SAVING 121 

race. The laws have often granted extreme rights of property 
and use, because it has been beheved that on the whole men 
have worked harder, produced more, and been happier, 
when they were given such almost unfettered rights of dis- 
posing of their product. Now, however, men are becoming 
more socially inclined. More and more, rich and talented 
men are coming to regard their riches and their talents as 
trusts that have been committed to them, rather than as 
possessions that they may squander without a thought for 
their fellows. As this feeling of responsibility, of steward- 
ship, becomes developed, our law is changing to recognize 
the change in the idea, and, so far as may be, to compel the 
unsocial to feign the virtue if they have it not. Indeed, 
save in exceptional instances, there may be no need for a 
change in the law, since public opinion would be sufficiently 
powerful to accomplish the purpose of checking lavish dis- 
play. 

But we must revert to our caution. Too great penurious- 
ness is an evil only less serious than prodigality. We must 
not forget that a rational expansion in the number and 
variety of human wants is necessary to human progress. 

The Waste of Harmful Consumption. — In speaking of 
luxurious consumption, we have said that it does not neces- 
sarily involve immediate and direct harm to the consumer 
himself. When such harm does result, it is more usual to 
speak of the consumption as harmful rather than as luxuri- 
ous. It goes without saying that harmful consumption calls 
for the censure of the economist no less than for that of the 
ethical teacher, since it is in the highest degree wasteful, 
whether regarded from the point of view of the individual or 
of society. When a nation devotes a large amount of its labor 
and capital to the production of commodities ivhich, in their 
consumption, cause more misery than happiness, and loeahen 



122 ELEMENTARY PRINCIPLES OF ECONOMICS 

the nation's future resources of energy and intelligence, there is 
a departure from economical consumption so serious as to call 
for the severest condemnation. If society would forego such 
injurious consumption, bread would be cheaper, higher wants 
would find satisfaction, and man would be working away 
from the beast's low level of mere sensual gratification. 

Some Rules for Economy in Choices. — We may exercise 
an influence over the growth of our own wants in such a way 
that a great real satisfaction may flow from a comparatively 
small expenditure. Thus (1) we should cultivate enjoyment 
or consumption that is inclusive {or inexclusive) rather than 
exclusive in its nature. It is evident that if a community 
can cultivate such a love for art that its satisfaction will 
consist in viewing beautiful pictures or statues rather than 
in owning them individually, it will be possible to secure such 
satisfaction by joint purchase most economically. Again, 

(2) tve should cultivate harmonious consumption. We all 
know, to take a homely example, that bread and butter 
together give a greater enjoyment than would result from 
the consumption of the two separately. But harmony of 
consumption is by no means limited to such simple cases as 
this. Whenever a group of commodities produces in combina- 
tion a greater satisfaction than results from the consumption of 
the same commodities separately, the consumption of the group 
is harmonious consumption, and is most economical. Finally, 

(3) we should cultivate variety in consumption. The greater 
the variety of goods consumed, the higher will he the marginal 
utility of the goods, and hence the keener the satisfaction in their 
consumption. Moreover, the wider the range of a man's 
likings, the more certain is he to find satisfaction under 
widely varying conditions, as when traveling among strangers. 
To take a simple instance, a family with little variety of 
taste or desire in the matter of food is at the mercy of price 



THE ECONOMY OF SPENDING AND SAVING 123 

changes within that limited range of food purchase, while 
those who have cultivated varied tastes are able to give up 
the consumption of any one form of food, when it becomes 
expensive, without great loss of enjoyment. If the Ameri- 
can people would cultivate a taste for other kinds of bread 
than that made from wheaten flour, they could get their satis- 
faction from the other kinds of bread as well as from the 
wheaten bread itself more cheaply than they now do. 

(B) The Economy of Right Use. — Hitherto, we have been 
speaking of a lack of economy due to the failure to choose 
the right commodities or to appropriate those chosen to their 
most advantageous uses. But even when they are so applied, 
there is generally some waste in the method of using them. 
It is even probable that more waste arises in this way than 
in the other, though the harm to character is, of course, in- 
calculably less. 

The Economic Importance of Housekeeping. — It is here 
that the great influence of the wife and mother can be seen. 
Probably not less than three-fourths of the income of the 
average family depends, for the economy of its expenditure, 
upon the woman to whom the affairs of the household are 
intrusted. The importance of this consideration has often 
been overlooked. Americans, in particular, have incurred 
the reproach of wasteful methods in providing food for the 
family. Such waste may result (1) from the choice of foods 
that contain relatively little nutriment; (2) from the choice of 
foods not well suited to the particular needs of the consumers; 
(3) from, failure to utilise all the material that is purchased and 
that would supply nutriment ; (4) from had preparation of 
the food ; (5) from failure to utilize to the full the fuel devoted 
to cooking. Similar wastes are repeated in the matter of 
clothing. It has been calculated by careful investigators, 
that through these channels there is a waste in the ordinary 



124 ELEMENTARY PRINCIPLES OF ECONOMICS 

family income of over one-tenth of the total. If the calcula- 
tion be correct, we may conclude that a stoppage of these 
wastes would enable the average family to secure its present 
enjoyments with a working day shortened by an hour, or to 
increase the sum of their enjoyments by more than a tenth 
without any increase in the amount of work required. 

SUMMARY 

1. Economy in consumption requires an economical balancing of 

expenditures between the present and the future, and an 
economical ordering of present expenditure : the one is the 
economy of " saving " ; the other, the economy of "spending." 

2. Saving, unless it is merely hoarding, is really spending for the 

future. Therefore, a wise balancing of present and future 
is secured by the mean between prodigality and parsimony. 
The prodigal is not a public benefactor. 

3. Economy in present consumption requires right choices and 

right uses of the things chosen. 

4. Luxury and harmful consumption both violate the rule of right 

choices and are uneconomical. Inclusive, harmonious, and 
varied consumption is most economical. 

5. The economy of right uses depends largely upon the home maker. 

QUESTIONS FOR RECITATION 

1. Discuss the fallacy: "Spending money makes trade good." 

Why and how does the man who saves spend? Through 
what agency is this spending for the future usually done in 
modern society? 

2. What two general principles must be observed in economizing 

on present expenditure? 

3. What is luxury? What are its economic effects? How does 

it differ from harmful consumption ? 

4. Explain by illustrations the economy of variety in consumption ; 

of harmonious consumption ; of inclusive consumption. 

QUESTIONS FOR STUDY AND DISCUSSION 

1. Why is a public library economical? 

2. What is meant by the statement that "saving is spending"? 

that "saving is spending for future goods"? 



THE ECONOMY OF SPENDING AND SAVING 125 

3. What would be the result if all men spent their income only for 

what they regarded as sheer necessities? 

4. Can a poor man save, i.e. spend for future goods, otherwise 

than by putting money in a savings bank, or by what is 
usually called investment ? What of expenditure for increase 
of efficiency of himseK or his children ? Can saving be carried 
too far? 

5. Use the marginal utility theory to show possible social gain 

from more nearly equal distribution of social income among 
men. 

LITERATURE 

See preceding chapters. Also : — 

Atwater, W. O. : "Food Waste in American Households" (article 

in Forum for September, 1893). 
Ely, R. T. : Property and Contract, Book I, Ch. VI. 
Hamilton, J. H. : Savings and Savings Institutions, pp. 31-38. 
Patten, S. N. : Dynamic Economics, pp. 39-49. 



PART II. PRODUCTION 

CHAPTER I 
INTRODUCTORY 

Why Production should be studied next. — We have 
made human vvants, consumption, and demand the first sub- 
jects of our study of economic theory because it is from these 
that all other economic phenomena take their rise. We have 
seen why men exert themselves in the work of production. 
The next logical step is to inquire how men go about the work 
of production. We have studied the cause and the laws of 
demand. We have next to make a similar inquiry regarding 
supply. Our present study therefore is of the general sub- 
ject of production. 

What Production is. ■ — Just as consumption means the 
destruction, not of matter, but of the particular utilities of 
certain forms of matter, so production means the creation, not 
of matter, but of utilities. Man cannot create matter. Neither 
the farmer nor the merchant adds one atom to the existing 
material of the earth. Yet both are called producers, and 
properly so. What, then, do they produce ? If one thinks 
about it, one will discover that they are producing utilities 
and nothing else. And how do they do this? Simply by 
putting things in places appropriate to that purpose. " This 
one operation," says John Stuart Mill, " of putting things 
into fit places for being acted upon by their own internal 
forces, and by those residing in other natural objects, is all 
that man does or can do with matter." 

126 



INTRODUCTORY 127 

All Production essentially the same. — It has seemed to 
some, even among economists of an earlier time, that the 
farmer is more truly a producer than the manufacturer, and 
the manufacturer than the merchant; but careful thought 
discloses the fallacy of such a view. All industrial classes 
alike produce one or more of the sorts of utility which we 
have described, and they do so by changing the relations of 
things in time or space. The farmer changes the position of 
grains of corn by dropping them into the earth. Then he 
removes weeds and throws earth about the rising stalks. 
Thus man's acts in changing the relations and position of 
things, aided by na.ture's materials and forces, result in more 
corn for human consumption. The manufacturer in the 
same way changes the position of pieces of matter, and, 
aided by natural forces within and without the object of pro- 
duction, he causes matter to assume a form which fits it, or 
better fits it, for human needs. So, too, the merchant 
changes the places of things from where they are less useful 
to where they are more useful, or holds them in one place 
until a change of external circumstances gives them a greater 
time utility. He is producing utilities as truly as is the 
farmer or the manufacturer. Of course it is possible that 
the utilities actually produced by merchants could be pro- 
duced with a smaller expenditure of economic force than is 
the case at present, and that saving could be effected by a 
better organization of the work of production. Again, it 
may be that the merchant may now and then secure a larger 
return for the production of a given quantity of utility than 
does the "farmer. But all this affords no justification for 
the popular impression that his work is really less productive 
in its nature than is that of any other industrial class. The 
only difference is in the sort of utility that the different 
classes are engaged in producing. Finally, it must be re- 



128 ELEMENTARY PRINCIPLES OF ECONOMICS 

membered that in the same way the physician, the teacher,, 
and all others who are engaged in rendering personal serv- 
ices, are creatmg utilities, and are therefore producers. 

Production, then, w^e may define as the creation of utilities 
by the application of man's mental and physical powers to the 
physical universe, which furnishes materials and forces. 

We have already defined goods and economic goods. It 
remains for us here to call attention to the fact that those 
quantities of utility that result from labor are economic 
goods, but that not all economic goods are to the same extent 
the result of labor. One may pick up a diamond or a nugget 
of gold upon which one has stumbled : in such a case it 
can hardly be said that the economic good is the result 
of labor at all. But even in such rare cases it must be 
remembered that while the one diamond or the one nugget 
may have required no labor in getting, yet the whole 
stock of such goods is the result of toil and suffering and 
privation for which the value of our diamonds and gold, 
it is frequently said, does not represent anything like a 
proper recompense. 

Yet there are clearly marked cases of value creation that 
are not wealth production. For example, the land on which 
New York and Chicago stand could once have been pur- 
chased for a very small sum of money. The great value 
which that land now has is to a considerable degree the result 
of human labor, but much of it is due to the great increase 
in population, which of itself represents no idea of labor. 
Such value is a product of social aggregation, not of individual 
effort. The question of the expediency of allowing indi- 
viduals to appropriate the rent of land, one of the individually 
unearned increments of value, will be discussed later. Here it 
concerns us only to notice that such unearned increments 
exist ; in other words, that there is such a thing in the world 



INTRODUCTORY 129 

as value creation which is not at the same time wealth pro- 
duction. 

Individual and Social Wealth. — This distinction between 
the individual and the social points of view runs throughout 
economics, and it is particularly important in the case of the 
concept of wealth or economic goods. What is wealth to 
the individual may not be wealth to society, and, on the 
other hand, what is wealth to society may not be within the 
ownership of an individual. Thus a mortgage is wealth to 
the individual who holds it, but it is not a part of social 
wealth, since if the claim for which it stands is extinguished, 
society is neither richer nor poorer. The case is the same 
with bonds issued by a city, a state, or a nation. To mark 
this distinction, such things as mortgages, notes, bonds, etc., 
are sometimes called " representative goods." From the 
point of view of society they are not wealth, but legally en- 
forceable claims upon wealth, or symbols of the part owner- 
ship of wealth. 

Productive Elements often overlooked. — There are 
many important facts regarding production which are often 
overlooked. Thus we are likely to forget that even to-day 
a large part of production is household production, and is 
not designed for the market place at all. 

Again, we are likely to overlook the fact that in the rural 
districts, where one-third of the population of the United 
States lives and works, there is annually produced a vast 
amount of goods which are destined not for the market but 
for home consumption. Vegetables, small fruits, — culti- 
vated and wild, — butter, eggs, meat, fish caught in public 
waters, and game are some of the things that may serve as 
illustrations. 

Considerations of this character show the great need of 
caution in attempting to compare the annual production of 



130 ELEMENTARY PRINCIPLES OF ECONOMICS 

one country with that of another, or to compare the annual 
production of the same country at different periods. House- 
hold production is becoming relatively less important, while 
the production of things for the market, the value of which 
is readily measured in money, is constantly gaining in im- 
portance. Hence, apparent annual production — the pro- 
duction of things which have a market price set upon them 
— is increasing more rapidly than is the real annual produc- 
tion. The result is a tendency to overestimate our progress 
and even to count as progress what may not be progress at 
all. Thus, should boarding house and hotel life displace 
private housekeeping, annual production might appear to 
increase as a result of the change, though the real wealth 
and income of the country would evidently be affected in no 
such degree. The fallacy underlying such statistics is the 
key to the old joke about a community whose members 
" get their living by doing one another's washing." 

Still further care must be exercised in studying oflScial or 
unofficial estimates of the wealth of a country. These esti- 
mates are ordinarily made in terms of money. Now if com- 
modities are very abundant, relatively to money, their price, 
other things being equal, will be low, though the real wealth 
of the country is great. If, for instance, the quantity of 
cotton cloth produced doubles between two census periods, 
while the price falls one-half, the total value of the product 
will appear in the census estimates as equal in the two cases, 
though it is evident that society in the second period has 
twice the amount of this valuable commodity. 

Over-production and Under-consumption. — It is not un- 
common to find men expressing a belief in the possibility of 
general over-production. Still more common is it for men 
to hold views which could only be correct if general over- 
production were a possibility. Even some economists a cen- 



INTRODUCTORY 131 

tury ago fell into the same error. By general over-production 
is meant a production of commodities in general beyond the 
needs of society. Careful thought will show at once the ab- 
surdity of such an idea. The purpose of production, as we 
have seen, is consumption. Manifestly, there has never been 
a time when more economic goods were produced than men 
really needed to satisfy their legitimate wants. On the con- 
trary, there has never been enough produced for this purpose. 
Sometimes, indeed, production moves forward unevenly, and 
undue amounts of labor and capital are for a time devoted 
to producing particular commodities ; but until all men are 
well fed, well clothed, and well housed, and furnished with 
material and other agencies for their higher life, such as books 
and pictures, it will be a manifest absurdity to talk about 
general over-production. When there is an almost universal 
difficulty in disposing of goods, the chief cause is not over- 
production but under-consumption. Men want the goods, 
but they cannot at the time dispose of their services, and 
consequently lack the purchasing power that would enable 
them to satisfy their wants. When any class of goods is 
produced in such quantities that the price falls below the 
cost, we may say that there is over-production of these 
goods. Such over-production is not uncommon. It is one 
of the unpleasant features of our complex organization of 
economic society that its parts do not always work together 
harmoniously. Producers are more and more separated in 
time and space from those who are to consume their products. 
It follows that only the shrewdest producers can calculate 
with any approach to accuracy how intense will be the wants 
for their goods, and in what quantities rival producers will 
furnish goods to the market. Mistakes in judgment result in 
over-production in particidar industries, and over-production in 
a few industries often leads to the spread of doubt and uncer- 



132 ELEMENTARY PRINCIPLES OF ECONOMICS 

tainty throughout the business world. Then men in their fear 
restrict production and thus incidentally close the market for 
labor. Laborers, seeking and failhig to find regular employ- 
ment, lose their purchasing power, with the result that the under- 
consumption spreads all along the line, and society passes 
through what is called a crisis or panic, followed by an indus- 
trial depression. Such crises and depressions have been 
starthngly regular since the Industrial Revolution, the 
greater ones coming at intervals of about twenty years, with 
minor ones in the alternating ten-year intervals. 

The explanation here given of crises and the resulting industrial 
depressions is widely aeecepted by economists, but there are two 
other explanations that should be mentioned. Some radical writers 
regard the unequal distribution of wealth as the fundamental cause. 
If wages do not rise in proportion to the general increase in wealth, 
it is argued, the mass of the consumers, who are wage-earners, will 
lack the means to pm-chase the goods produced. Again, other 
writers emphasize the monetary and credit aspects of crises. The 
crisis of 1893, for example, is by some regarded largely as a monetary 
disturbance. 

Production and Sacrifice. — Consumption regularly affords 
satisfaction. Production as regularly requires sacrifice and 
exertion. We should recall here, what we have already 
noted in studying consumption, that the balancing of the 
satisfaction of wants derived from consumption against the 
exertion and sacrifice required by production lies at the very 
center of all economic thought. It is true that much labor 
seems in itself so pleasurable that it affords its own satis- 
faction. ' But if such labor is not sufficient to produce the 
goods that society demands, other labor which does not con- 
tain its own reward must be applied to production, and the 
same reward will be paid by society for all labor applied to 
that end. In most cases, however, it will be found on inves- 
tigation, the pleasure comes from the actual or anticipated 



INTRODUCTORY 133 

result of the labor rather than from the labor itself. Again, 
when we consume to-day less than we have means to con- 
sume, with the object of greater production in future time, 
we are aiding in production by temporary abstinence from a 
possible pleasure. True, in such cases we hope to get in 
the future a satisfaction that will outweigh the present 
unsatisfied feeling, but the unsatisfied feeling is present 
with us and must be endured if we are to contribute to 
production. 

The Production of Goods and Services. — In what follows 
we shall treat the production of material goods and services 
together, since there is little essential difference between the 
two forms of production. It is worth noting, however, that 
the proportian of human effort devoted to the production of 
commodities and services respectively varies with the progress 
of civilization. In early stages, when only the most pressing 
wants are either felt or satisfied, men perform for themselves 
such simple services as are required. It is only later that 
there arises a want for such personal services as call for 
special training. The social order gradually increases in 
complexity, and as a result of new wants and increased means 
of satisfying them, division of labor among men makes a 
place for the singer and poet, the physician and priest, and 
for other classes who are engaged in producing personal serv- 
ices. As the production of material goods becomes better 
organized, requiring less proportionate human effort, greater 
numbers of people will find it profitable to specialize their 
training and effort toward rendering personal service of one 
sort or another to society. 

SUMMARY 

1. Production means the creation, not of things, but of utilities, 

by the application of man's powers to the physical universe. 

2. Individual wealth is not always social wealth. 



134 ELEMENTARY PRINCIPLES OF ECONOMICS 

3. Many productive elements, such, as woman's work in the house- 

hold, and the gathering of natural products for home use, 
are often overlooked. 

4. There can be no general over-production. What is thought of 

when that expression is used should rather be called under- 
consumption or unbalanced production. 

5. With advancing civilization, an increasing proportion of human 

energy is devoted to rendering speciaHzed personal services. 

QUESTIONS FOR RECITATION 

1. Define production. Compare the definition of consumption 

with that of production. 

2. Why and how is the physician a producer ? The teacher ? The 

actor ? 

3. Mention instances of individual wealth. Of social wealth. 

Do all your examples belong to both classes? 

4. As cities increase in size, the value of street railway franchises 

regularly increases. Is this value a result of production? 
Explain. 

5. What is usually meant by the expression "over-production"? 

Is such a thing possible? What is it that is commonly mis- 
taken for general over-production ? 

6. Show by a detailed explanation how it is that more men are 

engaged in rendering personal services than was the case in 
earlier days. 

QUESTIONS FOR STUDY AND DISCUSSION 

1. What economy results from the fact that with increasing popu- 

lation, there is a wider range of occupations open to individ- 
uals? 

2. Is there any sense in which it may be argued that soldiers in 

war are producers? Is theft a process of production? 

3. A farm worth $10,000 is mortgaged for $.5000. Is the value of 

the farm and mortgage together $15,000 or $10,000? Ex- 
plain. How should a tax be placed in this ease upon the 
wealth ? 

4. What utilities are produced and consumed in your home which 

do not have a money value put upon them? 

5. Germany owns her railways. How would this fact bear upon 

census estimates of the wealth of the German people as com- 
pared with similar estimates of the wealth of the people of 
the United States ? 



INTRODUCTORY 135 



LITERATURE 

For a general discussion of the subject of production, consult any 
standard work on Economics. A considerable number of these 
are given in the Appendix. See especially : — 

Marshall, A. : Principles of Economics, Bk. II, Ch. II, §§1 and 2, 

Mayo-Smith, R. : Statistics and Economics, Chs. Ill, IV, and V. 

Mill, J. S. : Principles of Political Economy, Bk. I, Ch. I, §§ 1 and 2. 



CHAPTER II 

THE FACTORS OF PRODUCTION 

The Three Factors. — Three things contribute to produc- 
tion as it is carried on to-day. They are therefore called 
the factors of production. Of these, two are called original 
or primary factors, because they exist in the very earliest 
forms of production, and because it is from them that the 
third factor is derived. These two factors are land, or 
nature, and labor. Of these, in turn, we may notice that 
one, land, is passive, while the other, labor, is active. In other 
words, it is primarily labor, acting upon nature, that pro- 
duces wealth. From this action of labor upon natm^e, fol- 
lowed by postponement of the enjoyment of the result of 
the labor, comes capital, which we therefore call a second- 
ary or derived factor. That is, it is secondary to nature and 
labor, and is derived from them. 

Nature or Land 

Meaning of the Term. — Under the term " nature " we 
here include all the material things furnished directly by her 
hand, together with all the natural forces used in produc- 
tion, — the power of the wind, the movement of water, gravi- 
tation, cohesion, etc. Some of these materials and forces 
are furnished in unlimited quantities, and are therefore free 
goods. It is common in economics to use the word " land " 

136 



THE FACTORS OF PRODUCTION 137 

instead of " nature," because of all the gifts of nature it is 
land with which we have chiefly to do in our science. But 
it must be remembered that the word " land " in this use 
has the very broad meaning which we have here given it. 
To avoid any possibility of confusion some economists have 
used the term " natural agents," when the broader meaning 
is intended. 

What Land does for Production.. — By analysis we learn 
that the service of land to production is not a single or a 
simple thing, but that it usually renders one or more of four 
distinct services. In the first place (1) it furnishes standing 
room, or situs. It gives men something, upon which they 
may rest and move about while conducting productive 
processes. Mere space is often a source of great value, as 
can be seen in the case of city real estate. As a continually 
increasing proportion of a growing population dwells in 
cities, this first service rendered by land is becoming more 
important. In the second place (2) it enables men to utilize 
the natural forces that go with the land itself. In the third 
place (3) land contains those elements needed by plant life, and 
thu^ renders a service to agriculture. We call this property of 
the land its "fertility." Finally, (4) land contains natural 
products below its surface, such as coal, gas, petroleum, iron, 
silver, and gold. Man does not create these natural treas- 
ures nor give direction to nature in their formation. Some 
nations have deemed it unfair that they should become the 
property of individuals, and have therefore treated them as 
a common heritage, exacting a rent or royalty for the oppor- 
tunity to exploit them. This is perhaps generally the case 
to-day on the continent of Europe; but English law, with 
its inclination to emphasize private rights, has by contrast 
fostered the idea that he who owns the surface owns down- 
ward to the center of the earth and upward to the sky. 



138 ELEMENTARY PRINCIPLES OF ECONOMICS 

The Law of Diminishing Returns from Natural Agents. — 
One of the most fundamental and far-reaching laws in eco- 
nomics is that which describes the result of investing labor 
and capital upon land or other natural agents. This law, 
known as the law of diminishing returns, will repay careful 
thought and study. We may profitably begin our study of 
the law in its application to agriculture. 

Every farmer is naturally desirous of reaping the largest 
possible return from his expenditure of labor and capital 
upon his land. Yet this very statement implies that there 
is a limit beyond which further expenditure will be unprofit- 
able. Let us see why this limit exists, and how it is deter- 
mined. Suppose the case of an acre of land which a farmer 
intends to " put into " potatoes. The field would yield 
some crop even if it were hurriedly and poorly plowed, if no 
fertilizer were used, and no care were taken to prevent the 
growing vines from destruction. Yet the farmer knows that 
further expenditure of labor and capital will result in a 
much larger crop, and that, if prices are good, the increased 
crop will fully repay the increased outlay. If we were to 
inquire more particularly from the farmer as to his opinion 
regarding the possibilities, we might get from him something 
like the following estimate : — 



An Intestment of 


Would Give a Total 


Oe 


AN Average per 


Return of 


DoLLAK Invested of 


$ 5 


40 bushels 




8 bushels 


ID 


100 bushels 




10 bushels 


15 


165 bushels 




11 bushels 


20 


200 bushels 




10 bushels 


25 


225 bushels 




9 bushels 


30 


240 bushels 




8 bushels 


35 


245 bushels 




7 bushels 



THE FACTORS OF PRODUCTION 139 

Let us stop for a moment to consider carefully what the 
table means. In the first column investment, of course, 
means dollars' worth of labor and capital expended in culti- 
vating the acre. Hence, if at a particular point the farmer 
gets a product that sells for an amount of money equal to 
the investment, he will have been repaid fully for his work 
and waiting. Moreover, the investment may, for the sake 
of simplicity, be thought of as at the date of the sale of the 
product, thus including an allov/ance for accrued interest 
on the labor and capital applied to the acre. But the num- 
bers in this column do not include any payment for the 
use of the land, since we are here considering only the 
cost of cultivation; moreover, as will later appear, our 
present study will show us how and why anything can 
be paid for the use of an acre of land, and how much can 
be so paid under any given conditions. The numbers in 
the third column are the quotients obtained by dividing 
the corresponding numbers in column two by those in 
column one. With this explanation of the table, let us 
now return to it to discover how it illustrates the laic of 
diminishing returns. 

An examination of the figures will show that doubling the 
expenditure, from S5 to $10, results in more than doubling 
the product, and that similarly the increase in the product 
is more than proportionate to the increase in expenditure in 
the case following. But notice that when the expenditure is 
increased from $15 to $20, — an increase of one-third, — the 
increase in the product is only from 165 bushels to 200 
bushels, — or only a little more than one-fifth, — and that 
in the same way in the following case, increasing the expendi- 
ture by one-fourth results in an increase of product of only 
one-eighth, and so on. In other words, up to a certain point, 
— here represented by the $15 investment, — an increase of 



140 ELEMENTARY PRINCIPLES OF ECONOMICS 

expenditure results in a proportionate or more than propor- 
tionate increase in return, while after that point has been 
reached, further increase in expenditure results in less than 
a proportionate increase in the return. If it were not for this 
fact, there would be no limit to the amount of labor and capi- 
tal which the farmer could profitably employ in the cultiva- 
tion of the acre of land. And the fact that farmers are every- 
where strictly limited as to the amount of such profitable 
expenditure is in itself complete proof that such a point of 
diminishing returns exists in the application of labor and 
capital to natural agents. 

In the table the least average cost of production appears to 
be at or near the investment of fifteen dollars, and the single 
bushel produced at least cost appears to be at the same point, 
so far as the numbers given indicate. But if the intervals 
between successive assumed investments were made suffi- 
ciently small, it would be found that the point of least aver- 
age cost and the point of least cost for the last or marginal 
bushel would not coincide. For when the bushel of least 
cost has been reached, it will be found that the next succeed- 
ing bushel, though costing more than the one before, never- 
theless costs less than the average of all produced up to that 
point, and hence its inclusion with those gone before will 
lower the average. The point of least average cost — some- 
what beyond the point of least marginal cost — is really the 
point of diminishing returns; but in the table no difference 
is apparent, and it will rarely be of practical importance to 
note such a difference. Hereafter we shall disregard it, un- 
less some practical consequence is involved. 

It will appear on reflection that the farmer will not neces- 
sarily discontinue his expenditure upon the land at the point 
at which the product begins relatively to diminish. The 
limit of profitable expenditure — or intensive margin of cul- 



THE FACTORS OF PRODUCTION 141 

tivation — will depend upon the expected price of the 
product. Thus at a price of ten cents a bushel, the farmer 
would lose absolutely in all except the second, third, and 
fourth cases in our illustration, and he would make a surplus 
only in the third case. At a price of nine cents a bushel, 
he could not afford to raise the crop at all. On the other 
hand, at a price of one dollar a bushel he could afford to 
expend $35 upon the acre, since the last $5 of expenditure 
would yield a return of five bushels, which would sell for 
enough to repay him for the marginal labor, materials, etc. 
We may, therefore, say that there are two ways in which 
the proportion of returns diminishes as expenditure increases : 
there is a diminishing return from the point of view of the 
product, and there is a diminishing return also from the point 
of view of the value of the product. The second is of course 
decisive with the farmer, hut this itself is due to the diminish- 
ing return measured in terms of the product. 

A further point remains to be particularly noted. An 
imperfect understanding of the nature of the law has led at 
times to the conclusion that as population increases it must 
inevitably become increasingly harder to secure the means of 
subsistence from the soil. But this conclusion is at variance 
not only with the known facts of the history of society, but 
also with the law itself when the law is properly stated. 
Such a conclusion would indeed be valid if the point of 
diminishing returns remained everywhere at the same point 
from year to year and from generation to generation. But 
we all know how far from the truth this last assumption is. 
The art of agriculture is constantly improving as a result of 
invention and the discovery of better methods and processes, 
and ever}^ improvement makes it possible to secure a greater 
crop without a greater expenditure ; in other words, every 
suxih improvement pushes forward the point of diminishing 



142 ELEMENTARY PRINCIPLES OF ECONOMICS 

returns. The law of diniinishing returns still holds true. 
There is still and always a point beyond which further invest- 
ment of labor and capital upon an acre of land will yield a 
less than proportionate return, but that point is not now 
reached so soon as before. 

We are now ready for a formal statement of the law we 
have been discussing. At any given time, there is a point in 
the investment of labor and capital upon a unit of any natural 
agent beyond ivhich further investment yields a less than pro- 
portionate return. 

We have taken for our illustration the case of labor and 
capital expended in agriculture. But the law is equally 
true of the expenditure of labor and capital upon land or 
other natural agents in the case of mining, manufactur- 
ing, and commerce. The only difference is that in these 
industries greater amounts of labor and capital may be 
expended upon a given unit of land, — say an acre, — 
before the point of diminishing returns is reached, than is 
the case in agriculture. 

The above statement of the law of diminishing returns is 
the one that has been most used in economic analysis ; and 
this form of the law will always be meant when reference is 
made to such a law, unless otherwise expressly stated. But 
it is possible to look upon the law of diminishing returns from 
other points of view than that adopted here. For example, 
instead of taking an acre of land as a unit and supposing suc- 
cessive amounts of labor and capital to be applied to it, we 
might have considered the farmer himself as the unit, giving 
him successive amounts of land, labor, and capital to manage. 
In this case we should also have found at first an increasing 
and then a diminishing return. And in like manner, we 
might consider the effect of combining increasing " doses " 
of land and labor with a fixed amount or unit of capital. 



THE FACTORS OF PRODUCTION 143 

Labor 

Definition. — The second of the primary or original fac- 
tors in production is labor. Labor is human exertion of mind 
or body undergone with the object of creating utilities. 

A common classification distinguishes mental from phys- 
ical labor. In making this distinction it is well to bear in 
mind that from the purest instance of mental labor to the 
purest instance of physical labor there is always some mixing 
of both forms. The philosopher must labor with hand or 
tongue if he would give the results of his thought to the 
world, and, on the other hand, even the ditch digger can by 
no means do his work without the exercise of intelligence. 

We must never forget that labor is not an end in itself, 
but is only a means to an end, the satisfaction of wants. 
With this thought firmly fixed in mind, it will not be diffi- 
cult to understand that increase of labor, unless it means in- 
crease of human satisfactions, is not socially desirable. 
Breaking window panes makes a chance for labor, but it 
does not increase human satisfactions as a result of that 
labor. On the other hand, labor-saving devices, while they 
may injure individual laborers, are beneficial to society as 
a whole, since they enable it to secure greater satisfactions 
by the same exertion. 

A Nation's Labor Force. — A question of prime impor- 
tance in connection with labor is that of the conditions affect- 
ing the total amount of a nation's labor, — what might be 
called the nation's labor force. What determines this ? Evi- 
dently it is not mere numbers, since a hundred workers in 
one country often furnish much more labor to production 
than do a hundred workers in another. Analysis of the 
subject shows that the two main determining factors are 
(I) effijciency and (II) quantity. The efficiency of labor de- 



144 ELEMENTARY PRINCIPLES OF ECONOMICS 

pends in turn first of all upon (1) the efficiency of the workers 
themselves, — upon their characteristics, mental, physical, 
and moral. Temperance, trustworthiness, skill, alertness, 
quick perception, comprehensive mental grasp ; — all these 
good qualities minister to the efficiency of the workmen, and 
hence of labor. In the formation of these qualities the phys- 
ical and social environment in which the laborers are 
reared and do their work is of the greatest importance. 

(2) The second influence conditioning the effijciency of labor 
is the manner in which it is organized and directed. As we 
are to discuss this separately and at some length in the next 
chapter, we need note here only that when labor is carefully 
organized and directed, so that each worker can do con- 
tinuously the work for which he is best fitted, the labor by 
that means becomes indefinitely more efficient. 

(II) The second factor in determining a nation's labor 
force is its amount or quantity. This again depends partly 
(1) upon the aggregate number of hours during which laborers 
work, varying with the length of the working day, the num- 
ber of holidays in the year, etc. A ten-hour working day 
means a greater quantity of labor than an eight-hour day, 
and therefore a greater labor force, provided the effijciency is 
not proportionately impaired by the long hours of work. A 
nation's labor force undoubtedly increases, other things 
being equal, (2) with the growth of population, which means 
a possible increase in the number of laborers. 

The Malthusian Theory. — Now, to the growth of popu- 
lation there is no absolute limit save that presented by the 
means of subsistence which can be secured. Throughout 
recorded history we again and again find the population of 
one country and another increasing to the starvation point ; 
i.e. increasing until the means of subsistence were less than 
sufficient for all who had been bom. From this fact has 



THE FACTORS OF PRODUCTION 145 

arisen a fear lest this over-population shall always repeat 
itself in the future as it has in the past. Those who are 
much moved by such a fear have often on their lips the theory 
called Malthusianism, from the name of an EngHsh econo- 
mist, Thomas Robert Malthus, who lived and wrote at the 
end of the eighteenth century and the first third of the nine- 
teenth century. According to this theory, population tends 
to increase in geometrical progression (i.e. by multiplica- 
tion : 2^-8-16 etc.), while the best that we can hope in the 
case of food is that it may increase in arithmetical progression 
(i.e. by addition, 2-4-6-8-10 etc.). Consequently, if there 
were no other checks upon the increase of population, men 
would soon reach the point of starvation. 

Positive and Preventive Checks upon Population. — It is 
admitted by the theory that such checks exist. These are 
of two kinds, positive and preventive. Positive checks are 
those that act through the death of tlie living, — checks that in- 
crease the death rate, such as plagues, pestilence, intem- 
perance, infanticide, cannibalism, and war. These positive 
checks may be " exclusively misery," as proceeding unavoid- 
ably from nature, or they may come indirectly from vice 
that leads to misery. Preventive checks are those that act 
through a lowering of the birth rate. These are found either 
in vices which result in incapacity for parenthood, or in what 
Malthus called prudential restraint, — a moral check, con- 
sisting in the postponement or avoidance of marriage, or of 
the upbringing of a family. Conscientious men will be slow 
to marry unless they can support a wife and rear their chil- 
dren worthily. As population becomes denser, such men 
find the burden of rearing a family heavier, and therefore 
postpone marriage or avoid it altogether. With every in- 
crease of the average age at marriage, the number of chil- 
dren born decreases more than in the same proportion. 



146 ELEMENTARY PRINCIPLES OF ECONOMICS 

Innumerable customs exist all over the world which have 
grown up from the social need of checking marriage and 
population, as, for instance, the custom which obtains in 
some peasant communities of marrying only when a cottage 
becomes vacant by the death of its former occupant. Mal- 
thus himself formally deduced only this lesson : let no man 
marry until he has a reasonable prospect that he will be able to 
support a family of the average size. He wished to intensify 
in Englishmen the feeling of parental responsibility. 

" Prudential Restraint." — It might be thought that such 
prudential restraint will come to be operative in such a way 
as easily to prevent the danger of over-population ; but Mal- 
thus himself often forgot the hope contained in man's 
gradual enlightenment, and took a gloomy view of the 
future. Others, following Malthus in his gloomy reasoning, 
have thought that there is no escape for the race from re- 
peated over-population with all its resulting vice and misery. 
Modern civilization, however, gives much cause for hope 
that as prosperity becomes diffused among the people, the 
problem of over-population may lose its serious aspect. 

Statistics show conclusively that everyvfhere advancing 
civilization has been accompanied by a decline in the birth 
rate. This decrease in the birth rate seems to have appeared 
first in France, where it is most extreme, and to have shown 
itself increasingly in later years there and in other countries, 
apparently moving from the well-to-do classes through the 
artisan class and towards or even to the class of the very 
poor. In, large though varying measure the tendency ap- 
pears among people of nearly all advanced countries, sec- 
tions, races, religions, and social classes, though interesting 
differences are observable. How far the tendency is a 
manifestation or an extension of the prudential restraint of 
which Malthus wrote, is still to some degree a matter of dis- 



THE FACTORS OF PRODUCTION 147 

pute, discussion of which would be beyond the just Hmits of 
an elementary text. 

Population and the Standard of Living. — In a later chap- 
ter, on Wages and the Labor Problem, we shall study at 
some length the influence exerted upon population by the 
standard of living, — the amount of necessaries, comforts, and 
conveniences which people are accustomed to enjoy. Here we 
may just pause to note that where the standard of living is 
a high one and is firmly maintained, anything that threatens 
it will set in operation the preventive checks to which we 
have referred. But the standard of living is not absolutely 
fixed, and changes in population through the action of pre- 
ventive checks come about only slowly. It may therefore 
happen that when the standard is assailed by continued 
national adversity, the rising generation may be brought 
up to accept a lower standard, according to which a greater 
increase of population will be possible and natural. Such a 
possibility represents one of the costs of war that has been 
too little considered. 

The Two Sources of Increased Population. — The popu- 
lation of any country, as distinguished from the whole 
world, has two sources of growth, — - natural increase and 
immigration. Natiiral increase comes about in any country 
through a continued excess of births over deaths; in other words, 
through a birth rate which on the average exceeds the death 
rate. Such an excess, however, may result from any one of 
several widely differing conditions. Thus some countries, 
e.g. Russia, have a very high death rate with a still higher 
birth rate, while in other countries, e.g. England, the in- 
crease results from an excess of a low birth rate over a still 
lower death rate. It is evident that the proportion of per- 
sons capable of labor, and hence the nation's labor force, 
will be greater where the death rate is low. Manifestly, too, 



148 ELEMENTARY PRINCIPLES OF ECONOMICS 

it makes a great difference in the real happiness of a country 
whether the increase in population is due to the one condi- 
tion or the other. In our own country, population has in- 
creased with wonderful rapidity for over a century both 
through immigration and natural growth. Down to the 
beginning of the Great European War, immigration con- 
tinued to increase almost without a break from year to year ; 
and though the birth rate has been gradually falling, the 
death rate has fallen almost as steadily, with the result that 
natural increase of the population has been uninterrupted. 

Capital 

Definition. — The third factor in production, the second- 
ary or derived one, is capital. Itself neither land nor labor, 
capital is derived from the two, and yet is a new thing with 
properties of its own. In everyday speech the word " capi- 
tal " is often used loosely to describe things that are not 
capital at all in the technical language of economics. Thus 
the word is often used to include land, because, in many re- 
spects, to the man engaged in a business enterprise there is 
little difference between liis land and his machinery. Yet 
technically the two should be sharply distinguished. Again, 
business ability is often described as personal capital, and 
there is a certain sense in which this figurative expression 
has a value ; but it should always be remembered that such 
language is only figurative. Land is natm-e; capital is a 
human product. Labor is indissolubly connected with the 
personality of the laborer ; capital is a material thing result- 
ing from that labor. Even more frequently in everyday 
speech do business men use the word capital to describe 
either the amount or value of the capital stock of a corpora- 
tion, or the whole value of a going business, — whether in- 



THE FACTORS OF PRODUCTION 149 

corporated or not, — including land, buildings, stock in 
trade, accounts receivable, money in bank and in till, etc. 
Hence the sharp caution here given that the word capital, 
as used by the economist to name the third factor in pro- 
duction, consists of those intermediate products which are used 
for the purpose of further production. More briefly still, 
capital means the produced instruments .of production. 

Classes of Capital Goods. — Capital is " the medium 
through which the two original productive powers exert their 
instrumentality." It includes not only all the (1) man-made 
aids to production, such as buildings, machinery, and tools, 
but also all those (2) unfinished goods, such as hides and bar 
iron, which enter into further production ; and also (3) finished 
consumers^ goods, so long as these have not passed into the pos- 
session of the final consumers, hut are still having added to 
them place and time utilities. Partly manufactured materials 
are technically spoken of as in the " process of ripening." 
Fully " ripened " goods in the possession of final consumers 
are no longer to be regarded as capital, although from their 
wise use new capital may result. 

The Function of Capital. — The function of capital may 
be expressed as follows : It enables men to utilite more com- 
pletely nature's materials and forces hy the substitution of 
roundabout methods of production for direct ones: and it 
accomplishes this result by furnishing the tools for such round- 
about methods, and by making possible a longer interval be- 
tween the initial effort and the final effect, or consumption. 
Roundabout methods are almost without exception more 
efficient than direct ones, but these methods require tools 
or machinery and a lengthened period of production. Thus, 
a man may lift a heavier weight by the roundabout method 
of using a lever, instead of relying upon his unaided strength, 
since in this way he summons nature's forces to his aid. 



150 ELEMENTARY PRINCIPLES OF ECONOMICS 

And generally speaking every improvement in machinery 
means a more roundabout method of applying labor. Capi- 
talistic production, therefore, as it develops, shows a con- 
tinual increase in the number of steps between the initial 
movement and the final product, and, as a general rule, an 
increase in the length of the interval. 

Improvements sometimes seem to shorten processes, but 
when we go far enough back in our studies, we find that the 
rule given above is in general correct and that it directs at- 
tention to one of the most remarkable and significant prin- 
ciples of capitalistic production. The student must not allow 
himself to fall into the easy mistake of confusing the last stage 
of the capitalistic or roundabout process with the whole 
process. A ride in a railway train means more than taking a 
seat in a car and being whirled through space. It means the 
efforts, reaching back through years, of men who have made 
roadbed, bridges, car, and engine; the earlier forms of 
capital by which these in their turn were made; and so on 
and on through a vista of years that tasks the mind to pene- 
trate. So too, in watching a threshing machine at work we 
note at first only that it threshes grain rapidly, but we have 
not grasped the real function of capital in this case until we 
recall the innumerable steps invol^^ed in the production of the 
machine and the length of the process when so regarded. 
The roundabout methods, of course, are not an end but a 
means to an end. 

The Origin of Capital. — It is often said that capital is 
the result of saving, but such a statement of the case is at 
least misleading. Saving, as such, is merely negative and 
cannot produce a positive result. In order that we may 
save, we must first have something to save, — that is, we 
must produce, — and, moreover, we must produce something 
more than is sufficient for existence; in other words, we 



THE FACTORS OF PRODUCTION 151 

must have a surplus. If such a produced surplus is laid by 
or saved, it may become capital. 

Methods of Capital Formation. — Such savings do become 
capital when they are devoted, directly or indirectly, to 
furthering production. One of the simplest ways in which 
saved surplus may be transformed into capital would be 
illustrated by the case of a fisherman who should use part 
of the catch of one period for subsistence while in a later 
period he worked at a canoe, or net, or other device for in- 
creasing the product of his future labor. In advanced com- 
munities the process is usually much more complex. The 
farmer, for instance, who wishes a self-binder, pays for it 
directly with money. But the money has been received in 
return for a saved surplus of his farm products. Mean- 
while, those who have been working on the manifold pro- 
cesses which result in the finished farm machine, have been 
supported from a surplus which has been advanced to them. 
The case is the same with the manufacturer. He may sell 
his products and consume at once the resulting means of 
livelihood or he may consume less than all, and with his 
remaining means may purchase from others the forms of 
capital of which he stands in need. Or, having all the 
machinery needed, he may invest his surplus in the stock 
of some company, in which case the company will use it 
for the purchase of needed capital goods. In all these cases 
the use of money obscures the nature of the transaction, 
which is at bottom only the turning of a part of society's 
labor force from the production of finished consumption goods 
to the production of capital goods in order later to increase 
and make easier the production of consumers' goods. 

Summing up, then, we may distinguish logically the fol- 
lowing steps in capital formation : (1) production beyond the 
necessity of the present; (2) postponement of the consumption 



152 ELEMENTARY PRINCIPLES OF ECONOMICS 

of part of this product; (3) use of the saved surplus to Tnake pos' 
sihle greater future production. 

Results of the Use of Capital. — It remains for us to say 
a few words regarding the results of the use of capital. 
First of all, (1) capital makes possible an increased amount of 
product. Things that could be produced by hand and with- 
out capital can be produced in much greater quantities when 
capital is present. In the second place, (2) capital makes 
possible certain goods which we could not enjoy at all without 
it. Thus, the enjoyment of oysters and shellfish at great 
distances from the coast would be impossible without the 
capital engaged in transportation. Finally, (3) capital 
makes possible in many cases a higher quality of product than 
could exist in its absence. 

Representative Goods. — One class of goods, if they may 
be so called, must be especially distinguished from capital 
in the technical sense of the word. ■ We refer to what we 
have earlier called " representative " goods, which from the 
point of view of society are not goods at all, but only signs 
of the ownership of goods. Notes, mortgages, bonds, and 
stock certificates are not social goods ; they simply represent 
ownership. Neither are franchises a part of social capital. 
When a city grants to a company a franchise for the con- 
struction and operation of a street railway, it does not 
thereby directly create new capital. It merely grants per- 
mission to the company to make use of existing social capital 
or to create social capital. 

Fixed and Circulating Capital. — It has been common 
among economists to classify capital as fixed and circulating. 
Circulating capital is that which can be used but once, or in 
one round of operations, its value passing once and for all into 
the value of the finished product. Fixed capital, on the other 
hand, is capital which lasts through a siiccession of operations, 



THE FACTORS OF PRODUCTION 153 

only a part of its value passing over into the product with each u^e. 
Thus, the raw materials and the partly finished goods used 
in manufacturing are examples of circulating capital, while 
the factory building and the machinery are fiixed capital. 

Free and Specialized Capital. — A classification, which 
superficially resembles the one just given, but which is really 
quite distinct from it, is that of free and specialized capital. 
Even more than is commonly the case with such classifica- 
tions, these words must be understood as pointing only to 
relative ideas. Specialized capital is that which by its 
form or circumstances can he used for only one line of pro- 
duction, or at most for a very limited number of such lines of 
production. Free capital, on the other hand, is capital 
which can he applied to any one of a considerable number of 
lines of production. Thus coal, iron, and leather are rela- 
tively free forms of capital, while railways, canals, and many 
forms of machinery are relatively specialized. The prac- 
tical importance of the difference lies in the fact that free 
forms of capital can more readily adjust themselves to 
changes in the social demand for goods. Thus, if too great 
an amount of a nation's capital is converted into specialized 
forms, — into railways, for example, — the mistake is not 
easily or quickly corrected, and the entire production of the 
country must suffer in consequence of the bad adjustment. 
Such disproportionate investment of capital in specialized 
forms is believed by some economists to be the most im- 
portant single cause of crises and industrial depressions. 

SUMMARY 

1. Of the three factors of production, land and labor are primary 

and original, while capital is secondary and derived. 

2. Land furnishes "standing room," natural forces, fertility, and 

natural treasures. 

3. Labor means human exertion of mind or body undergone with 

the object of creating utilities. 



154 ELEMENTARY PRINCIPLES OF ECONOMICS 

4. A nation's labor force depends upon its efficiency and quantity ; 

efficiency depends upon the efficiency of the individual 
laborers, and upon the efficiency of their organization ; 
quantity depends upon aggregate working hours and number 
of workers. 

5. Capital consists of intermediate products used for further pro- 

duction. 

6. The formation of capital involves saving or postponement of 

possible consumption. 

QUESTIONS FOR RECITATION 

1. Mention some of the checks upon population. How does the 

standard of life affect the increase of population? 

2. Why should land be distinguished from capital? To which 

class does a building upon land belong? the fertilizer that 
was used five years ago? 

3. What advantages flow from roundabout processes of produc- 

tion? Mention some of the steps in the development of 
indirect processes in the production of wheat. 

4. Distinguish between free and specialized capital ; between fixed 

and circulating capital. What are representative goods? 

QUESTIONS FOR STUDY AND DISCUSSION 

1. In what sense is it true to say that labor produces all goods, or 

that capital is not productive? 

2. Is capital active or passive as regards man? as regards nature? 

3. Is tennis for recreation to be classed as play or as work ? amateur 

basebaU? professional baseball? burglary? 

4. Discuss America's labor force from the point of view of the 

ana,lysis of this chapter. 

5. What is the effect of a long-continued high rate of infant mor- 

tality upon the proportion of workers in any population? 

6. Prepare a table illustrating the law of diminishing returns in 

such a way as to show the difference between the minimum 
average cost and the minimum cost of a single bushel. 

LITERATURE 

Clark, J. B. : The Distribution of Wealth, Ch. IX, pp. 116-123. 

Commons, J. R. : The Distribution of Wealth, Ch. III. 

Fetter, F. A. : Principles of Economics. 

Marshall, A. : Principles of Economics, Bk. IV, Ch. I, § 1. 

Seager, H. R. : Introduction to Economics. 

Seligman, E. R. A. : Principles of Economics. 

Taussig, F. W. : Principles of Economics. 



CHAPTER III 
THE ORGANIZATION OF PRODUCTION 

In the preceding chapter we have considered the factors 
of production separately, studying the nature of each, and 
the principles governing its efficiency and increase. We 
have now to study the manifold ways in which production 
in our day has come to be socialized and organized. It is 
as though we had studied the nature of the various parts of 
a machine, and were then to study further the different ways 
and methods of putting the parts together, and to learn how 
the resulting whole acted as a unit when the machine was 
" set up." 

I. Organization of the Factors Regarded Collec- 
tively 

Early Simplicity. — We have already seen that the three 
main parts of the great machine of production are land, 
labor, and capital ; and we may therefore first of all inquire 
how these parts are " assembled " for efficient work. In 
other words, the first problem in our present study is that 
of the cooperation or organization of the factors of produc- 
tion taken together or collectively. This organization, in the 
early stages of social development, was exceedingly simple. 
The old household economy was so organized that, if it were 
universal to-day, we should not think of distinguishing in it 

155 



156 ELEMENTARY PRINCIPLES OF ECONOMICS 

the three separate factors. The same man owned the land, 
the labor, and the capital, and as sole judge of what was 
right distributed the total product among those who aided 
in production. When, with advancing civilization, produc- 
tion came to be carried on by village communities, there was 
collective ownership of the instruments of production and 
management by a common authority, and the distribution 
of the product was regulated by custom. Later, under the 
gild organization of industry and commerce, there was a 
similar lack of sharp separation of the factors. The early 
gilds embraced apprentice, journeyman, and master, and 
regulated industry and commerce under governmental super- 
vision. The master directed the business, owned the capital, 
and worked with his own hands. He received the entire 
product of the business after supporting the apprentice and 
paying the journeyman. Labor was in a certain degree set 
off from the other factors, but the separation was by no 
means complete. The man who at any time supplied labor 
looked forward, not without reason, to the time when he him- 
self in turn should become capitalist, employer, and manager, 
for such advance was a regular part of the gild system. 

Growth of Complexity. — As has been explained in earlier 
chapters, the last one hundred and fifty years or so have 
witnessed a great change in the organization of the produc- 
tive factors. Here and there traces still survive of the earlier 
simplicity, and one great branch of production, agriculture, 
is generally carried on in our country without much separa- 
tion of the ownership of the factors. A large proportion of 
our small farmers own the land they cultivate and the capital^ 
they employ, and depend wholly or in great part upon their 
own labor and that of their families for their product. But 
in commerce, manufacturing, and transportation, we have 
as a rule to-day one large class furnishing labor only, another 



THE ORGANIZATION OF PRODUCTION 157 

class furnishing capital and sometimes land, and a third 
class organizing and managing business. A modern railway 
corporation serves as a good illustration of this. The holders 
of the bonds and stocks furnish the capital, and receive in 
return interest on their bonds and dividends on their stock. 
Labor, supplied by others, is paid for by wages and salaries. 
The land is also regularly supplied by the bondholders, being 
acquired by the exchange of a part of their funds. Conse- 
quently, we have rent also, though this does not usually 
appear as a separate item in railway bookkeeping, except in 
those cases where the land has been leased instead of being 
purchased outright. Finally, the managers and directors of 
the business, chosen by the stockholders from their own 
number or from without, constitute a separate class in the 
organization. 

The Entrepreneur. — It is easy to see that when business 
organization has grown so complex, some central guiding 
intelligence is necessary, which shall overlook the whole 
field, and, after deciding what things shall be produced, and 
in what quantities, shall provide that the necessary factors 
of production work together in creating the product. The 
man who does this usually assumes the risk of loss or failure, 
and, on the other hand, pays a stipulated sum to those per- 
sons or classes who supply him with the factors of production. 

In the England of the eighteenth century such a man was 
called an " undertaker " or " adventurer." As the word 
"undertaker" has since come to be applied to one small and 
special class of business men, and as the word " adventurer " 
now carries with it an idea of rashness or even dishonesty, 
the French word " entrepreneur," an exact equivalent of the 
word " undertaker," is now commonly used, though in recent 
years the name " enterpriser " or the figurative title " Cap- 
tain of Industry " is frequently used instead. 



158 ELEMENTARY PRINCIPLES OF ECONOMICS 

The function of entrepreneurship has become of the utmost 
importance in modern society, and seems to be growing in 
importance with every increase in the complexity of indus- 
trial organization. The entrepreneur has been well called 
the " Captain of Industry," since it is he who marshals and 
commands the industrial forces, and more than any one else 
bears the responsibility for failure or success. Business 
enterprises under able leaders achieve brilliant success only 
to languish and become banla-upt when death removes the 
guiding hand and brain. Whole towns in many cases depend 
for their prosperity upon a few* shrewd Captains of Industry. 
Possibly, however, the importance of any one individual for 
the success of a business tends on the whole to decline with 
growth in the complexity of industry. The organization of 
a vast modern corporation, with its large directing board 
and its many executive officers, seems to secure an imper- 
sonal stability and permanence that may defy the chances 
and changes inevitable in the life and work of the single 
individual. 

The function of entrepreneurship is so important in modern 
industry, and the services of the entrepreneur so distinctive, 
that it might almost be well to treat the entrepreneur or 
entrepreneurship as a fourth factor of production, in addition 
to those explained in the preceding chapter. Indeed, when 
we come later to discuss the shares of social income secured 
by the various factors, we shall recognize the peculiar and 
distinct character of entrepreneurship by studying its sepa- 
rate share under the name of profits. 

The Forms of Business Undertaking. — The entrepreneur- 
ship of a business is not always undertaken by a single in- 
dividual. On the contrary, a rapidly increasing volume of 
business is coming to be carried on in forms which call for 
a division of the function or functions of the entrepreneur 



THE ORGANIZATION OF PRODUCTION 159 

among many individuals. The following are among the 
main forms of business undertaking in the modern world : — ■ 

1. The Single Entrepreneur System. — In this form of busi- 
ness, a single individual owns or hires the capital and land, 
employs the labor, directs the business, and bears the whole 
risk. 

2. Partnership. — In the case of a partnership, the owner- 
ship, direction, and responsibility are shared, sometimes in 
unequal proportions, by the two or more partners, who as a 
rule are severally liable at law to the full extent of their 
fortunes. 

3. Business Corporations. — This form differs from the 
foregoing chiefly in the fact that the individual responsibility 
of the members of the corporation is limited by the charter 
or by the statutes governing such companies, and in the 
further fact that there is no necessary legal limit to the life 
of such corporations. On account of the magnitude of busi- 
ness transacted under this form, it often happens that the 
functions of entrepreneurship are divided, the shareholders 
owning and controlling the business, and bearing the risk, 
but committing the active management to elected directors 
and, through the directors, to hired superintendents and 
managers. 

One of the most striking characteristics of the industry of 
the United States during the last fifty years has been the 
mighty trend from individual and partnership to corporate 
ownership, especially in the fields of transportation, mining, 
and manufacture. Transportation has passed almost com- 
pletely into this form. Mining is not far behind. In manu- 
facture, according to the thirteenth United States census, 
corporations reported 79 per cent, or nearly four-fifths, of 
the value of all manufactured products in 1909. Ten years 
earlier, 65 per cent of the value of manufactures had been 



160 ELEMENTARY PRINCIPLES OF ECONOMICS 

produced by corporations. It is not improbable that by 1920 
the proportion of the entire value of manufactures produced 
by corporations will have risen to 90 per cent. In agricul- 
ture the tendency is so slight that the United States census 
has made no study of the forms of ownership. But it is a 
matter of common knowledge that there are farms owned 
and managed by corporations. 

4. Cooperative Businesses. — In what is technically known 
as cooperative production, the workmen combine, — under 
the legal form of partnership or corporation, — in the owner- 
ship or control of the other factors of production, share all 
risks, and secure direction of the business either through 
their own members, chosen for the task, or through regular 
salaried managers. This form, therefore, in its legal char- 
acter, cannot be distinguished from the foregoing. 

5. Government Enterprise. — The Federal, state, and local 
governments severally own and manage many businesses of 
great importance. In these cases the people as a whole own 
the business and bear all risks, while they commit the direc- 
tion to elected or appointed managers. 

II. The Organization of the Factor Labor 

In studying the forms of business undertaking, we have 
really been studying the different ways in which society 
secures cooperation and organization of the factors of pro- 
duction as a whole. We have now to study the ways in 
which the factors, considered separately, are organized for 
increased efficiency. And &st as to labor. 

If it were possible to conceive of a people among whom 
every individual produced for himself all that he used, ex- 
changing products with no one, we should have an example 
of isolated or unorganized labor and unorganized production. 



THE ORGANIZATION OF PRODUCTION 161 

But there is no evidence that such an extreme state of things 
ever obtained anywhere. Wherever we find men gathered 
together, we find some socialization, some organization of 
their efforts to secure a Hving, some organization of the 
factor labor. 

Forms of Organization. — 1. Simple Associated Effort. — ' 
One of the earliest forms of organization to be developed 
among men, and one that still plays a considerable part in 
the economy of the world, is that which has been named simple 
associated effort. V/hen a group of men unite their efforts in 
raising a heavy weight, or two men beat together a heated 
iron or work a saw, we have illustrated this simple form of 
organization. Sometimes, as in the first of these cases, the 
combination is to effect a result which could not be accom- 
phshed at all by the single individual. Always the combina- 
tion results in a greater accomplishment than would flow 
from the sum of the efforts of the several individuals. 

2. Division of Occupation. -^ With advancing civilization, 
industry as a whole has been more and more broken up into 
parts, and the parts have, therefore, constantly been grow- 
ing smaller. One of the earliest steps in the organization of 
labor, perhaps even earlier than that which we have de- 
scribed above, was taken when the members of primitive 
society began to specialize in their work. And the whole 
story of society since, not only in its economic phase, but in 
all its other phases as well, has been a lengthening tale of 
increasing specialization of work or function. With division 
and subdivision constantly taking place, it is clearly impos- 
sible to recognize or name all of the stages of progress. But 
two of these stages are recognized in popular speech as of 
distinct character. The first of these is what we may call 
division of occupations. Probably the most primitive form 
of such division was that by which among savages the men 

M 



162 ELEMENTARY PRINCIPLES OF ECONOMICS 

took upon themselves the functions of warriors and hunters, 
putting upon the women the tasks of the household and the 
field. Division of occupations is indicated by the names of 
the manifold trades or cahmgs. 

3. Division of Labor. — The further subdivision of exist- 
ing occupations has been largely the work of the last few 
centuries, and especially of the last two. To this further 
subdivision — this further organization — of labor has been 
given the technical name division of labor, although, as we 
have seen, division of occupations is but an earlier division 
of labor on larger lines. This form of organization is of 
such prime importance in modern industry that it calls for 
detailed and careful study. 

In our discussion of labor as a factor of production, it was 
pointed out that the efficiency of labor is in great measure 
conditioned by the efficiency of its organization. Such effi- 
ciency of organization is secured in the highest degree through 
division of labor. Division of labor — as well as division 
of occupations — might perhaps with equal propriety be 
called cooperation of labor. Productive processes, especially 
in manufacturing, are to-day divided into minute parts, one 
part or perhaps two or three very small parts being given to 
each worlonan, or to each group of workmen. Thus, in a 
modern watch factory, one workman makes one small part 
of a watch, another a second, and so on. So many are the 
divisions of the process of watchmaking that it has been said 
that no fewer than 300 worlanen are required for the efficient 
working- of such an establishment. In the same way, in- 
stead of one man performing all the operations in the mak- 
ing of a boot, as was once the rule, we have to-day a front 
cutter, back cutter, back-stay cutter, top cutter, facing 
cutter, lining cutter, sorter and buncher, size and case 
marker, stay skiver, top sldver, crimper, front trimmer, top- 



THE ORGANIZATION OF PRODUCTION 163 

front stitcher, top-back stitcher, and so on to as many as 
113. But while the workmen divide the processes among 
themselves, they unite in producing the completed article, 
and hence we may say that division of labor implies coopera- 
tion of labor. When we use the phrase " division of labor," 
we are looking at one side of the process ; while, when we 
speak of cooperation of labor, we are viewing it from the oppo- 
site side. And the same is true of division of occupations. 
Division of Labor Illustrated. — A good illustration of divi- 
sion of labor is afforded by the needle-making industry as it 
is generally conducted to-day. Steel wire, which is itself the 
product of highly divided labor, is the raw material of the 
needle factory. All needles pass through the same general 
list of processes. These, as the visitor to the factory may 
view them, are in outline as follows : The wire is first put 
through a machine called the straightener and cutter, which 
removes all bends in the wire and cuts it into pieces about 
one-third the length of the finished needle. These short 
pieces, called blanks, are placed in small iron cylinders, which 
are rotated in such a manner as to keep the wire in constant 
motion under friction. They are thus freed from scale and 
dirt, and are ready for " cold swaging." For cold swaging, 
the blanks are put into a hopper, from which they are taken 
by machinery, one at a time, and held so that one end is 
presented to the action of a set of revolving sectional steel 
dies. By the constant opening and shutting of these rotating 
dies, the end is compressed and drawn out to form the needle 
'' blade." After the swaging is finished, another bit of ma- 
chinery is made to stamp upon the flattened surface of the 
needle a number or mark, which indicates what sort of needle 
it is finally to be. Inequalities are next remedied by trimming 
all blanks to a uniform length. When the blanks have been 
trimmed and stamped, they are taken to a grooving machine, 



164 ELEMENTARY PRINCIPLES OF ECONOMICS 

by which a short groove on one side of the needle and a long 
groove on the other side are made simultaneously. The 
needle is now ready for its eye. Women are usually employed 
in this process, which calls for a high degree of manual dex- 
terity and keen sight in controlling the blanks as they are 
" fed " through the machine. One girl with modern ma- 
chinery can punch about seven thousand needle-eyes a day, 
or more than a dozen a minute. The needles are next given 
their points by machines, which differ according to the kind 
of point, as " round," " twist," " diamond," etc. So far as 
shape is concerned the needles are now complete; but the 
softness of the steel up to this point makes them useless for 
practical purposes. They must therefore be hardened and 
tempered, and this in turn requires several distinct processes 
and opportunities for divided labor. Next they are 
sharpened and polished by a piece of machinery which holds 
nearly a hundred of them at once against a brass wire scratch- 
brush revolving 8000 times a minute, and afterward against 
a bristle brush. The eyes of the needles are then smoothed 
by stringing the needles on a cotton thread, covered with oil 
and emery, which is drawn back and forth at different angles 
to the needles so that the polishing powder acts on all parts 
of the aperture. Next follow finish pointing, — done on a 
fine emery, — and finish polishing, done by a revolving brush 
with crocus and alcohol. Counting and packing offer still 
further opportunities for divided labor, by which the utmost 
economy of energy is achieved. 

The Advantages of Division of Labor. — It has been usual 
for economists to enumerate the advantage of the division 
of labor as follows : First of all, it secures (1) a gain or saving 
in time. This gain in time is twofold, (a) The workman 
does not have to pass so frequently from one operation to 
another, and (6) he can learn his special process in less time. 



THE ORGANIZATION OF PRODUCTION 165 

In the second place, division of labor secures (2) a gain in 
skill. In the third place, the system results in (3) a gain 
in adaptation, by finding a place for everyone and putting 
everyone in his place. The man who is physically or mentally 
strong can devote his whole time to work that is worthy of 
him, while the man who is weak in muscle or in mind can 
find work in which great powers would in part be wasted. 
In the fourth place, division of labor secures (4) a gain by 
paving the way for invention. The processes being rendered 
simple, the individual workman can make himself more 
familiar with them, and can therefore see where and how 
improvements can best be made. It therefore results that 
an ever increasing proportion of modern inventions come 
from the brains of the worlonen. In this view of things, we 
may say that invention is becoming more and more a social 
process. Finally, division of labor secures (5) a gain through 
a more complete utilization of capital. Each workman, using 
one tool or one set of tools, or operating one machine, keeps 
the capital employed all the time. 

Disadvantages of Division of Labor. — But division of 
labor has also its dark side. First of all, the system, by 
making possible and profitable the employment of women 
and children, (1) often deprives men of their employment and 
leads to the exploitation of loomen and children. In American 
cities, one may sometimes find fathers at home " keeping 
house," while their wives and children are working long 
hours in factories. In the second place, division of labor 
(2) gives rise to a dependence of man upon man that is often, 
at least in part, an evil. Thus a strike by a particular group 
of men in one business, — mining, for instance, — may throw 
out of employment not only all the other men in that busi- 
ness, but also thousands or tens of thousands of other men 
whose work depends upon the product of the industry in 



166 ELEMENTARY PRINCIPLES OF ECONOMICS 

which the strike occurs. The same sort of hardship results 
from division of labor when workmen too old to acquire a 
new trade are deprived of their usual employment by a 
change in the conditions or methods of production. Thus 
the invention of the typesetting machine threw tens of thou- 
sands of highly skilled and highly paid craftsmen out of em- 
ployment. These evils, to be sure, right themselves in the 
long run ; but, as one writer has keenly remarked, the long 
run is too long for the ordinary man, whose life is but a short 
run. And how long may be the run required in cases where 
children have been brought up in homes demoralized by the 
enforced idleness of the family head? A third evil con- 
nected with the system of divided labor is, that by it (3) labor 
often loses its attractiveness and, at the same time, its educa- 
tional value. A workman who makes a whole watch can 
acquire such love for his work as makes him an artist ; but 
who can learn to love the mere routine of putting metal 
disks under the face of a die for ten hours a day? " It is," 
as one writer has well said, " a sad thing for a man to have 
to testify that he has never made more than the eighteenth 
part of a pin." 

III. The Organization of the Factor Capital 

In the foregoing discussion of the organization of labor, 
it will perhaps have been noticed that the organization of 
labor is intimately associated with the organization of capi- 
tal. That division of labor would never have developed 
without the organization of capital in the form of machinery 
which is characteristic of modern industry, is well illustrated 
in the description of divided labor in the needle industry. 
We need not concern ourselves further, therefore, with a 
separate consideration of the organization of capital, since 



THE ORGANIZATION OF PRODUCTION 167 

what has been said of the one appHes with only minor 
changes of expression to the other. We may pass at once 
to consider the factor, land, 

IV. The Organization of the Factor Land 

Territorial Division of Labor. — To a certain extent the 
same is the case with the organization of natural agents as 
with the organization of capital. Labor is human effort 
applied to natural agents, usually aided by capital. Organi- 
zation of labor, therefore, generally involves at the same time 
organization in the use of natural agents and capital. But 
there is one form of organization of production that is so 
generally conditioned by the factor, nature, that we may 
well treat it as a form of organization of the natural agents 
themselves. The two names most commonly applied to this 
form of organization are localization of industries and terri- 
torial division of labor. As with the division of labor, so with 
localization of industries, the tendency is toward increasing 
specialization of function, in the one case among persons, in 
the other among places. Thus the territorial specialization 
by which country districts supply the towns with food, re- 
ceiving manufactured goods in exchange, — society thus 
dividing its labor into country work and city work, — re- 
sembles the primitive division of occupations, among savages, 
into man's work and woman's work. And the finer territorial 
specialization by which certain agricultural regions produce 
almost exclusively some one product or some few special 
products, while certain manufacturing centers similarly de- 
vote themselves to making some one commodity or some 
few commodities, may, in the same way, be likened to that 
form of division of labor which we have described at length. 

The twelfth United States census disclosed many interest- 



168 ELEMENTARY PRINCIPLES OF ECONOMICS 

ing illustrations of territorial division of labor or localiza- 
tion of industry. Thus, more than half the gloves of the 
country, measured by their values, were reported as being 
made in the adjoining towns of Gloversville and Johnstown, 
in east central New York. Moreover, the value of the 
gloves manufactured was more than two-thirds of the total 
value of all products manufactured in the town in the case 
of Gloversville, and more than one-half in the case of Johns- 
town. Troy, New York, produced nearly three-fourths, in 
value, of all the collars and cuffs made in the country, and 
nearly seven-tenths of all the manufacturing workmen in 
Troy were engaged in this one industry. Philadelphia made 
over 45 per cent of the country's carpets. Nine-tenths of 
the wage-earners in South Omaha, Nebraska, were engaged 
in slaughtering and meat packing. The thirteenth census 
showed that territorial division of labor had progressed even 
further than in 1899. 

Among the causes which lead to such localization of in- 
dustry the following are probably most important : (1) near- 
ness to materials, (2) nearness to markets, (3) water power, 
(4) favoring climate, (5) local supply of the kind of labor needed, 
(6) local supply of investment funds, (7) the momentum given 
by an early start. Inasmuch as most of these causes have 
to do with geographical considerations, rather than with 
labor, it will be understood why we have treated localization 
of industries as a form of organization of natural agents, 
rather than as a phase of the organization of labor. 

Just as advancing civilization brings increased specializa- 
tion or division of labor, so we maj'^ expect that the future 
will witness an ever growing specialization of industry on 
geographical lines. Increasing stability of governments, im- 
proved methods of rapid transit, the breakdown of interracial 
antipathies and prejudices, are making world markets possi- 



THE ORGANIZATION OF PRODUCTION 169 

ble, and with the world markets will come a condition of affairs 
in which every country and every section of every country 
will confidently produce to the utmost those goods in the 
production of which it enjoys the greatest relative advantage. 

V. Conditions Determining the Organization op 
Production 

We have already noted in passing one or two of the condi- 
tions upon which depends the efficiency of organization of pro- 
duction. It may be well to bring them together at this point 
and to speak at the same time of an even more important fac- 
tor which conditions all production, no matter how organized. 

1. Extent and Character of the Population. — Perhaps first 
in logical importance is the size and character of the popu- 
lation. The more numerous the consumers, the greater 
must be the supply of goods ; and the greater the supply of 
any commodity, as a general rule, the more minute will be 
the organization which will be found economically profitable. 
This idea is often expressed in the statement that "division 
of labor is conditioned by the extent of the market." 

2. Growth of Capital. — The second great condition of the 
organization of industry is the growth of capital, whether 
in the form of machinery or in the form of means of trans- 
portation and communication and exchange. Improvements 
in machinery have made increased specialization and organi- 
zation technically possible, while railways, telegraph and 
cable lines, and banks have widened the markets and have 
thus made such organization economically possible, that is, 
profitable. 

3. The Character of the Industry. — Not all industries lend 
themselves equally to some of the kinds of organization that 
we have described, no matter what the population or the 



170 ELEMENTARY PRINCIPLES OF ECONOMICS 

extent of capitalization. Agriculture has hitherto in the 
main defied all attempts at minute division of labor. Manu- 
facturing lends itself to division of labor in the highest degree. 
Without entering into a discussion of all the technical reasons 
for this difference, we may say that the main requirement, 
within the industry itself, for minute organization is that 
the different processes shall permit of being carried on simul- 
taneously. We all know that this feature of industry is 
characteristic of manufacturing, and that, on the contrary, 
it is almost entirely lacking in the case of farming, in which 
dependence upon nature's changes necessarily results in serial 
processes. 

4. The Character of the Government. — A fourth condition 
of efficiency of organization is the character of the govern- 
ment. Even the most advanced states differ in many ways 
in structure and in the legal conditions which they enforce, 
but all civilized states secure at least the following conditions 
of efficient organization : they ail (a) maintain the institution 
of private property; (b) protect life and property from enemies 
without and within the nation's borders; (c) create and maintain 
the institution of contract; and (d) participate directly in indus- 
try in cases in which it has been clearly proved that individuals 
will not act at all or will not act for the best interests of industry 
as a whole. Thus, all civilized governments maintain coin- 
age systems, regulate weights and measures, establish and 
care for docks, lighthouses, and roads, and maintain a con- 
sular service in foreign lands. 

"VT. Large-scale and Small-scale Production Com- 
pared 

Modern times have witnessed a wonderfully rapid growth 
in the average size of the individual business. Indeed, the 



THE ORGANIZATION OF PRODUCTION 171 

change in the size of the business unit during the past half 
century is perhaps as striking as the change from house 
industry to factory industry in the second half of the eight- 
eenth century. The movement has gone so far and is still 
proceeding so rapidly as to excite very general fear as to its 
social consequences. Certain dangers resulting from the 
consolidation of large competing corporations will be dis- 
cussed elsewhere; but it is pertinent at this point, in con- 
nection with the subject of the organization of production, 
to advert briefly to the advantages claimed for large-scale 
production and, on the other hand, to economies open to 
small-scale producers severally or in cooperation. 

Advantages of Large-scale Production. — The advantages 
claimed for production on a large scale resolve themselves 
into two general classes : (1) economies in making goods, 
and (2) economies in marketing goods. As to the first, it is 
claimed that in production on a large scale there is a saving 
in (a) capital cost, per unit of product, both in fixed and 
in circulating capital; in (6) labor cost, owing to the possi- 
bility of more efiicient organization ; in (c) the possibility of 
making improvements, both through the employment of 
special investigators and inventors, and through the com- 
parison of methods in different departments of the same fac- 
tory or in the same departments of different factories under 
the same ownership ; in (d) the cost of superintendence; in 
(e) the utilization of waste, as is instanced by the Standard 
Oil Company and the large beef and pork packing companies ; 
in (/) providing their own aids to making and marketing, — 
making their own cans, boxes, etc., and owning railways and 
steamship lines, etc. In businesses enjoying this last ad- 
vantage, we have examples of integration of industry as well 
as of concentration of industry. 

Among the second class of advantages claimed for large- 



172 ELEMENTARY PRINCIPLES OF ECONOMICS 

scale production, economies in marketing the goods, are the 
following : (a) economy in securing trade, through advertis- 
ing and commercial travelers ; (&) economy in " carrying " 
stocks of goods, a relatively smaller stock being sufficient to 
meet the fluctuations in demand ; (c) economy in getting goods 
to consumers, through the power to secure better freight rates 
for large shipments, and through the power possessed by some 
concerns to avoid " cross freights/' — that is, to ship goods 
always from the nearest point of supply and hence to avoid 
having shipments of the same class of goods pass each other 
on their way to consumers ; {d) economy in securing a foreign 
market, through the greater power of the large concern to 
withstand the cutthroat competition common in " hard times." 
Economies open to Small-scale Producers. — Against 
these advantages of large-scale production may be set the 
following considerations which^seem to promise a continua- 
tion of a considerable measure of small-scale production, at 
least in certain lines of industry : (a) First of all, it is claimed 
by experts that in many lines of business a plant of moderate 
size is the plant of really maximum efficiency in regard to 
capital and labor costs, (b) In many cases the advantage 
of the large-scale business in the matter of concentration of 
power is neutralized by the fact that modern invention, 
especially in connection with electricity, is revolutionizing 
the methods of distribution of power, putting the small manu- 
facturer more nearly on a level with his greater rival, (c) It 
is, furthermore, very doubtful whether large-scale producers 
can secure" that minute and economical supervision which 
characterizes small-scale industry ; whether, in other words, 
hired managers can compete in this regard with individual 
entrepreneurs who will reap all gains as they bear all risks. 
(d) The small producer has a distinct advantage in his greater 
power to know the personal wants of his market. In many in- 



THE ORGANIZATION OF PRODUCTION 173 

dustries the personal element plays so large a part that the 
small producer will for a long time be able to hold his own, 
even if he cannot oust the large producer from the field. 
Finally, by cooperation of neighboring small producers, it is pos- 
sible to secure much the same opportunities as to (e) invention 
and improvement of processes and (/) utilization of "waste " that 
we have spoken of as regularly present in large-scale industry. 

It must be borne in mind that our comparison has been 
between small-scale and large-scale production, not between 
small-scale production and monopolized production. Mo- 
nopolized production is usually, though by no means always, 
production on a large scale. But production on a large scale 
is not at all the same thing as monopolized production. 
Had we been speaking of the production of monopolized 
goods, it would have been possible to add many to the list of 
alleged advantages or economies in production, and some of 
the advantages of which we have spoken would in the case 
of a monopoly have been much more marked and undisputed. 
Thus in the matter of " cross freights " and again in the 
case of advertising, many would admit advantages in the 
case of a monopoly who would deny that they accrue simply 
to large-scale production. 

This whole matter of the relative advantages of small- 
scale and large-scale production has been of late days the 
subject of rather acrimonious debate, and can by no means 
be regarded as settled. 

"VTI. Four Views as to the Right Relation of 
Society toward Trusts 

Four views seem logically possible as to the right relation 
of organized society to the great industrial concerns which 
we have come to call by the misleading name Trusts. 



174 ELEMENTARY PRINCIPLES OF ECONOMICS 

First, there is the view that the big concern is in every 
way beneficent, in achievement and in promise, and that 
society should keep " hands off " ; that those immediately 
interested in these businesses, in ownership and control, 
know better than the public can know how they should be 
managed, and that any social injury that selfish interest 
might inflict, — if such injury must be admitted as even a 
possibility, — would be less than the social injury sure, in 
this view, to result from the bungling of an ignorant and 
planless society. This view is found, sometimes expressed, 
more often implicit, in many great newspapers and other 
influential sources of public information, and is urgently and 
more or less successfully pressing for acceptance in the coun- 
cils of American political parties. 

• The second view, representing another phase of our in- 
herited ideas, is that Trusts are evil, and an unnecessary 
evil; that they have grown out of unscrupulous force and 
corruption rather than from economy; that, even though 
possible economic gains may be credited to them, yet such 
gains cannot for a moment weigh in the scale against the 
advantage the small industry has always secured as a train- 
ing school in initiative, business morality, individual respon- 
sibility, — in short, business character. Those who hold 
this view propose, therefore, that the strong arm of society 
should reach out to tear apart these giant combinations of 
our day, and enforce among the smaller concerns resulting 
from the dissolution a competition like that " our fathers 
used to know." This view to-day has relatively few open 
defenders, but among its champions are men of the keenest 
intelligence and best tested public-mindedness. Its practical 
influence upon legislation and administration has been 
greater than the number of its advocates would lead one to 
predict. 



THE ORGANIZATION OF PRODUCTION 175 

A third view is that Trusts are primarily products of 
economy, though too often the economy has been reenforced 
by fraud and force ; that the old small-business scho-n] of 
character must be supplemented — perhaps at some future 
day even be replaced — by new methods of training, evolved 
from the conditions of our own time and better suited to 
those conditions ; that the economies of large-scale produc- 
tion can be and should be turned to the advantage of con- 
sumers through reduced prices rather than to the further 
enrichment of a few business supermen through enhanced 
profits ; and that if society is not now wise enough or strong 
enough for the task, our ignorance and weakness must, at 
our peril, give way to intelligence and strength ; that the 
rallying cry of America should be, not efficiency nor democ- 
racy, but efficient democracy. Those who hold this view 
therefore advocate a policy of active, constant, complete 
regulation, a policy that has gained rapidly in popular accept- 
ance and in practical influence during the opening years of 
this century. 

The fourth view — that of the Socialists — is like the 
third in asserting the economy and inevitability of " trusti- 
fication." Socialists would go even further and claim that 
what has happened in a part of the industrial field is fated 
to occur universally. But to the socialist the proposal to 
regulate is a subject for pitying smiles or smiling pity. Quis 
ciistodiet custodes f If we can save ourselves at all, if we can 
secure for ourselves the economies of large-scale production, 
— the socialist calls it " socialized production," — we can 
do it through collective ownership and management, and in 
that way alone. Over sixty years ago, Karl Marx, the 
greatest figure in the socialist movement, saw or foresaw the 
tendency to concentration. His followers claim for his pre- 
vision or prediction the same sort of glory that the world 



176 ELEMENTARY PRINCIPLES OF ECONOMICS 

accords to the discovery of the planet Neptune, which was 
found where it is because by Leverrier's calculation it had 
to be there. 

The four views here characterized may be summarized 
more briefly as follows : (1) Trusts are inevitable, economical, 
and beneficent, and will be most beneficently and intelligently 
managed, if unregulated: (2) Trusts are not inevitable, eco- 
nomical, or beneficent, and hence should be compulsorily dis- 
solved: (3) Trusts are inevitable and economical, but in the 
highest degree dangerous unless they are so regidated as to pre- 
vent abuse and to turn their economies to the advantage of the 
public: (4) Trusts are inevitable and economical, and will be- 
come universal; we cannot regulate them; we must own and 
operate them; if we cannot, democracy has failed. 

SUMMARY 

1. Growth in the magnitude of industry has resulted in increased 

complexity of industrial organization. 

2. The entrepreneur directs the organization of the factors, but 

his function is sometimes shared among many individuals. 

3. Forms of organization of the factor labor are simple associated 

effort, division of occupations, and division of labor. 

4. Organization of the factor nature gives rise to localization of 

industry. 

5. The limits of profitable organization of industry are the size and 

character of the population, the amount of capital, the character 
of the industry itself, and the character of the government. 

6. In some industries there are many advantages in production 

on a large scale. Against these may be set other features in 
which the small-scale producer may hold his own, or even 
enjoy an advantage. 

7. There ate four views as to the nature and origin of " trusts," and 

four views as to the proper attitude of organized society toward 
them. 

QUESTIONS FOR RECITATION 

1. How was cooperation of the factors secured before the Industrial 
Revolution ? To what extent does this method obtain to-day 
in advanced nations? 



THE ORGANIZATION OF PRODUCTION 177 

2. Name some of the duties of an entrepreneur. 

3. Name the different forms of business undertaking. Discuss 

them from the point of view of their relative strength and 
weakness. 

4. How does division of occupations differ from division of labor? 

5. State the advantages of the division of labor ; the disadvantages ; 

the advantages of large-scale production ; the economies 
available to small-scale producers. 

6. Why does not farming lend itself to the division of labor ? 

QUESTIONS FOR STUDY AND DISCUSSION 

1. Is there any relation between the increase in the average size 

of business units and the recent establishment of schools and 
colleges of commerce, administration and finance, and the 
Uke? 

2. Is there a relation between the development above mentioned 

and the rapid growth of trade-unions ? 

3. What is the official position, if any, taken by the different 

political parties with regard to trusts? 

4. Does increasing division of labor furnish an argument for 

specialization in school and college education, or the contrary ? 

5. Does division of labor make for fuUness of life and breadth of 

character, (a) directly; (b) indirectly? 

6. Make a study of the wonderful di^dsion of labor in a Chicago 

abattoir. 

7. Describe the processes under a system of divided labor in some 

industry with which you are acquainted. 

LITERATURE 

Ely, R. T. : Monopolies and Trusts, pp. 187-190. 
Haney, L. H. : Business Organization and Combination. 
Jenks, J. W. : The Trust Problem. 

Report of the United States Industrial Commission, Vol. II. 
Smith, Adam : Wealth of Nations, Bk. I, Ch. I. 
Van Hise, C. R. : Concentration and Control: a Solution of the 
Trust Problem in the United States. 



K 



PART m. TRANSFERS OF GOODS 
(EXCHANGE) 

CHAPTER I 
INTRODUCTORY 

The Nature of the Subject. — We have now studied two 
of the main parts of economic analysis and theory. We 
have learned something regarding the consumption of goods, 
and also something regarding their production. We have 
now to study the question how and by what means goods 
are exchanged among men, and what determines the quanti- 
tative ratios in which they exchange. By the conditions of 
modern industry almost every man produces more of some 
one commodity or of some few commodities than he himself 
consumes ; and, on the other hand, every man consumes 
very many goods which he himself has not produced. In 
other words, production to-day is almost entirely " for the 
market." This is possible only because men transfer goods 
from one to another. Such transfers of goods constitute a 
very great part of our economic life. The business of one 
important industrial class, that of merchants, consists in 
effecting such transfers. The operations in which merchants 
are engaged we call by the general name commerce. But 
commerce requires a multitude of other businesses to assist 
it, among which, especially prominent, are those of providing 
means of communication and transportation and exchange, 

178 



INTRODUCTORY 179 

such as public roads, railways, telegraphs, telephones, and 
banks. These agents of commerce, while they do not con- 
fine their functions entirely to the assistance of merchants, 
do aid the entire community in bringing about desired trans- 
fers of goods. 

Exchange. — Transfers of goods are of two kinds : they 
may be either one-sided transfers, as in the case of gifts, 
bequests, inheritance, taxes, and fines; or they may be 
two-sided transfers, as is the case with nearly all economic 
transfers with which we have to do. 

The part of economics which we are about to study is by 
most economists called " exchange," because the term "ex- 
change," referring to two-sided transfers, covers so many 
of the transactions that are the subject of our study. But 
since money and banks, which are to be treated in the pres- 
ent part of the book, are agencies in effecting one-sided 
transfers as well as two-sided transfers of goods, we have 
included the name " transfers " with the simpler word 
" exchange " to express more completely the nature of the 
subject. 

Since exchanges of goods regularly increase the utility 
of the goods exchanged, it is evident that exchange is a part 
of production and might be treated under that general 
heading. But the phenomena of exchange are of a character 
so distinct and so important that it is considered better to 
treat them in a part by themselves. 

Advantages of Exchange. — It is not uncommon even 
to-day to hear men talk as if an exchange of goods could 
benefit only one of the two exchangers. Sometimes, indeed, 
men speak as if what is gained by one party to an exchange, 
whether an individual or a nation, must be at the loss of the 
other. We do not stop to think that when we purchase a 
hat or a suit of clothes, we regularly profit by the trans- 



180 ELEMENTARY PRINCIPLES OF ECONOMICS 

action ; but it is evident that if we did not think the thing 
purchased more useful to us than the money paid for it, 
we would not make the exchange. Let us study for a moment 
the reasons why men find it profitable to exchange. In the 
first place, (1) the tastes and customs which in part determine 
utility vary (a) from nation to nation, and (b) from man to 
man. It is evident, then, that when a commodity passes 
from an individual or a nation with little taste for it to one 
with a strong liking for it, the exchange increases the utility 
of the commodity. In the second place, (2) different coun- 
tries or different regions of the earth differ from one another 
in their (a) natural or (h) acquired advantages in the production 
of different commodities. Goods that one country or one 
section can easily produce in abundance either because of 
superior natural advantages or because of the skill of its 
workers, derived from long experience, another country or 
section may be able to produce only with great difficulty. 
Thus, the planter of the South and the farmer of the North- 
west can both profit by the exchange of the cotton of the 
one for the wheat of the other. In the third place, (3) 
individuals also differ from one another, either (a) by nature 
or (b) by training, in their fitness for different hinds of work. 
Thus, one man is especially fitted by nature or by training 
for carpentry, another for milling. In all such cases each 
individual will find his greatest advantage in doing that which 
he can best do, exchanging the surplus of his product for 
other goods which he desires but which others can produce at 
greater relative advantage or at less relative disadvantage. 
The Machinery of Transfers. — In every modern nation 
there now exist on a large scale institutions and appliances 
for the furtherance of transfers. These may be briefly 
enumerated as follows : (1) means of transportation and 
communication ; (2) systems of weights and measures ; (3) 



INTRODUCTORY 181 

money and credit, banks of various sorts, clearing houses, 
and the like ; (4) stock and produce exchanges ; (5) commer- 
cial laws and commercial administration, including the 
assistance of consuls who act in part as commercial agents 
of their governments in foreign countries ; (6) middlemen of 
all sorts, including retail and wholesale dealers. Inasmuch 
as exchange is a part of production, these instruments and 
agencies of exchange are also instruments and agencies of 
production. It is through them that goods receive the 
time, place, and possession utilities that fit them for final 
consumption. 

SUMMARY 

1. Transfers of goods are of two kinds : one-sided and two-sided. 

The latter are known as exchange, under which heading 
this general subject is often treated. Exchange develops the 
phenomena of value and price. 

2. All exchange is regularly profitable to the two parties to the 

transfers, for the reasons that men and places differ in their 
natural and acquired aptitudes for diilerent kinds of produc- 
tion, and that individuals and nations also differ in their 
tastes and customs in consumption. 

3. Modern industry has developed an elaborate mechanism for 

its exchanges, including means of communication and trans- 
portation ; systems of weights and measures ; money and 
credit and banks ; stock and produce exchanges ; commercial 
laws and administration ; middlemen of aU sorts. 

QUESTIONS FOR RECITATION 

1. Give examples of one-sided transfers ; of two-sided transfers. 

2. State the advantages of exchange. 

3. Mention some of the means of transportation ; of communica- 

tion. 

4. What is the relation of exchange to production? 

QUESTIONS FOR STUDY AND DISCUSSION 

1. How would the adoption of international systems of weights 
and measures aid exchanges? 



182 ELEMENTARY PRINCIPLES OF ECONOMICS \ 

2. Does a fall in postage rates affect territorial division of labor? j 

3. Do children in a "shoe town" have a better chance than others i 

to acquire skill in the shoe industry? i 

4. What are some of the sources of advantage in exchanges between I 

the United State? and Cuba? Between a lawyer and a I 
doctor ? 

' LITERATURE j 

\ 

Any standard treatise. See particularly : \ 

Nicholson, J. S. : Principles of Political Economy, Vol. II, Ch. I, , 

pp. 3-10. i 



CHAPTER II 
VALUE 

Meaning of the Term. — One of the most important and 
difficult problems in economics, and the central problem 
in transfers or exchange, as well as in distribution, is that 
of the determination of value. Why do goods exchange 
for one another in the proportions that they do ? Why do 
the proportions in which they exchange vary from time to 
time ? This is the problem we now have to study. 

The Idea of Subjective Value. — First of all we must 
note that there are two closely related but distinct ideas 
of value, which have been called by the names " subjective 
value " and " objective value." Let us try to get an under- 
standing of these ideas and of the relation between them. 
Our study of the law of diminishing utility has shown us 
that as our stock of any commodity increases, the marginal 
utility falls; that is, we care less for an additional portion 
of it. We satisfy our most intense wants first, and, as our 
stock increases, our unsatisfied wants grow less and less 
urgent. If, for example, we had but a very small amount 
of water, we should use it for drinking purposes only : a 
first increase might be used for bathing ; a second, for wash- 
ing dishes and clothes, and so on. The greater the stock, 
the less would be the importance for our welfare attaching 
to any unit of that stock ; the less sacrifice would we under- 
go to get an additional gallon ; and the less should we trouble 

183 



184 ELEMENTARY PRINCIPLES OF ECONOMICS 

ourselves about the loss of a gallon. It is the marginal utility 
that determines the economic importance of any commodity 
in our estimation. These phrases, capacity to excite desire, 
marginal utility, economic importance, are commonly used 
as synonymous with the term " subjective value." 

Subjective Use Value. — But if we inquire carefully into 
our own thinking, we shall find that there are two processes 
of subjective valuation. The very core and kernel of our 
thought on the subject probably lies in the idea that we form 
in our minds as to the importance for our welfare of a unit 
of any commodity, whether we have it in our possession or 
are merely thinking of our possible possession of it. Thus 
when we search our minds we find at least a rough estimate 
of the importance to us of each article of our clothing; of 
a ton of coal in the cellar ; of an automobile or an aeroplane, 
though we may not own one ; and so on throughout the range 
of things that have or might have a bearing on our economic 
life. This root or germinal idea of value, which is really 
the same as the idea of marginal utility, is to be distinguished 
from the others by the name subjective use value, which may 
be defined as the economic importance of a unit of any commod- 
ity to the one valuing it. 

These estimates, these subjective use valuations, are 
essentially incommunicable. That is, we cannot convey 
them to the mind of another human being. To illustrate 
first from another field, we cannot tell another what " black " 
is to us. The physicist may establish the physical fact that 
black means the absence of light and hence of color; but 
you cannot by repeating the physicist's explanation com- 
municate to the mind of a friend what idea or feeling the 
word " black " calls up in your mind. How would you try 
to impart the idea of black or blue or white to a man blind 
from birth ? " But," you will perhaps say, " though I cannot 



VALUE 185 

tell such a blind man what I mean by white, I can tell it to 
one who sees." Hold a moment. It must of course be 
admitted that when you tell a friend from the tropics that 
snow is white, the word white represents for you, at least in a 
general way, the same impression as that made by milk, 
clear-weather clouds, and the like, and that the word will 
also call up for your friend similar examples of whiteness. 
But have you any knowledge, can you know, that the color 
impression made by milk and clear-weather clouds — white- 
ness — is the same for you as for your friend ? The fact 
is that in such a case you can communicate to another noth- 
ing but a comparison, implied without need of expression. 
And the same is true of our estimates of subjective use value. 
We cannot communicate them. When we try to do so, we 
find ourselves driven back upon comparisons. Thus, if 
you try to tell your friend how much you want a book, or a 
pair of hockey skates, you will find yourself falling back 
upon such a statement as this : " I would be willing to go 
without this or that for a whole year if I could have the 
skates," or " I would be willing to work for a month to get 
them." But you have not told your friend by this how 
great is the absolute importance to you of a month's time 
with the opportunity to do something else or to do nothing. 
Subjective Exchange Value. — And this brings us to the 
second stage in the logic of valuation. Not only are we 
constantly valuing individual units of commodities by them- 
selves, but we are also as constantly making comparative 
estimates among these. Hence results subjective exchange 
value, the quantitative ratio between ttvo subjective use values 
in the mind of the one luho does the valuing. Notice that 
although the word exchange is used in this name, it does not 
refer to any actual, objective exghange, but only to a mental 
process, to what might be called an imaginary exchange. 



186 ELEMENTARY PRINCIPLES OF ECONOMICS 

Subjective exchange values may be communicated to the 
mind of another. Thus v/hen one says : " The gray horse 
is worth double the black mare," he may well mean that, for 
his own economy, the gray would have twice the economic 
importance of the black, though he does not, be it noticed, 
tell us, — he cannot tell us, — except in comparative terms, 
what would be the importance to him of either the gray or 
the black. 

Objective Exchange Value. — We are now prepared for 
the third stage in the development of the process of valua- 
tion, — for the idea of value that is most frequently in mind 
when men use the word, i.e. objective exchange value. Let us 
suppose that two men meet each other, both cut off from 
society indefinitely, and both stocked with provision of the 
same goods, which for simplicity we may suppose reduced 
to two, bread and coffee. Let us suppose further that for 
one of the two men, John Doe, the subjective use values of 
his coffee and bread are represented by the numbers 8 and 
1, for pound of coffee and loaf of bread respectively; and 
that for the other man, Richard Roe, the subjective use values 
are respectively 10 and 2. We have already explained that 
no man can communicate to another absolutely his subjective 
values, and we cannot, therefore, — except by the proverbial 
story teller's license of omniscience as to the minds of his 
characters, — presume to know that a loaf of bread has for 
John Doe a value 1 and for Richard Roe a value 2. But 
they might stand in that ratio, and here, for illustration's 
sake, we assume that we know them so to stand. 

Now, oil the basis of the figures as given here, it might 
be concluded that John Doe and Richard Roe could not 
swap, since Richard Roe is credited with higher subjective 
use values of both commodities. In other words, we assume 
that Roe wants both another loaf of bread and another 



VALUE 187 

pound of coffee more than Doe does. But further considera- 
tion will show such a conclusion to be in error. If Doe wants 
another pound of coffee eight times as keenly as he wants 
another loaf of bread, while Roe wants another pound only 
five times as keenly as he wants another loaf, Doe is relatively 
overvaluing coffee and Roe is relatively overvaluing bread. 
Both will therefore gain from an exchange. Doe will give 
up part of his bread for part of Roe's coffee. As each finds 
his stock of one commodity increasing and his stock of the 
other correspondingly decreasing, the subjective use values 
and the subjective exchange values of each man will change 
to correspond to the changing stage of his provision. John 
Doe's ratio stood before at 8:1. As exchange continues, 
the first term of his ratio will fall, the second rise. Richard 
Roe's ratio stood at 10 : 2. As he parts with coffee for 
bread, the first term of his ratio will rise and the other fall. 

How long will the exchange continue? The answer to 
this question is already implied in what has been said above, 
— exchange must, economically, continue until the ratios 
become the same for the two men, somewhere between 8 : 1 
and 5 : 1 {i.e. 10 : 2), It cannot be asserted with certainty, 
or even probability, that the resulting ratio of equilibrium 
will be the half-way point, or 6-|- : 1, since it is very improbable 
that the increase and decrease of stock will have the same 
significance for the two men. All that we can assert with 
certainty is that exchange will stop when the subjective ex- 
change values of bread and coffee — not the siibjective use 
values — have become the same for the two men. 

In the two earlier ideas of value, we were dealing only 
with mental processes, with things going on in the minds of 
men. Now we have reached an idea of value that is rep- 
resented by actual physical phenomena. Bread and coffee 
are being exchanged. We can count the loaves and weigh the 



188 ELEMENTARY PRINCIPLES OF ECONOMICS 

coffee. What we have written about the states of mind of 
Roe and Doe was to explain why and how the exchange took 
place, to show the relation of subjective value to objective 
exchange value. But we need not have been mind readers 
to understand the second of these two. If we had heard 
them say no word, we should still know the objective ex- 
change value, if we could count the loaves that Doe passed 
over to Roe and the pounds that Roe passed to Doe. If, for 
instance, we find that 40 loaves of bread and 6 pounds of 
coffee change possession, we know that in that market, at 
that time, the objective exchange value of bread per loaf is 
1 : 6f in terms of pounds of coffee, and conversely that the 
objective exchange value of coffee per pound in terms of 
loaves of bread is, 6f : 1, i.e. 6f. Objective exchange value is 
the quantitative ratio in which goods or services actually ex- 
change. 

Whenever two or more minds, entertaining different subjective 
exchange values, meet, the meeting of their minds constitutes a 
market; in that market differences in subjective exchange values 
disappear by exchange, and the ratio of the exchange is the 
then objective exchange value in that market. 

Value and Price. — In our illustration we have chosen a 
case of barter, because here as in most cases it is easier for 
the mind to grasp the real character of the transaction when 
freed from the more complex idea of money. A sale of 
goods for money may, it is true, be regarded as a direct act 
of barter, money being thought of for the moment as like 
any other -commodity. But in a more fundamental view, 
money merely mediates a barter in which one-half the trans- 
action is postponed. That is, in selling goods for money it 
is as though we had taken butter or eggs to a country store, 
possibly reserving to a later time decision as to what goods 
we should receive in exchange. Every act of exchange, 



VALUE 189 

whether for money or for other goods, registers a value ; but 
when we name values in terms of money value, we use the 
specific name price. Price, then, is simply value expressed 
in terms of money. Value is the genus, of which price is 
the best known species. 

What is a Market? — For the sake of simplicity, we have 
illustrated the origin, cause, and nature of exchange by an 
assumed economic meeting of two men. The form of our 
illustration has a further value, then, if it leaves sharp in 
the mind the impression that not more than two minds 
meeting are necessary to the idea of a market, — a fact 
which we are likely to forget or fail to understand because 
most markets represent the meeting of many minds. In the 
bigger, more active markets, values are held fairly steady 
because so many minds there meet. 

Our physical presence is not needed to constitute a market. 
Through the post office, the telegraph and telephone, and 
the " wireless," men's minds may be projected into many 
scattered markets for many commodities, without need that 
their bodies should follow. Thus, for example, the market 
for securities is much broader than the mere rooms in which 
the brokers of London, New York, and many other cities 
meet for their transactions. It is made up of millions of 
clients or possible clients scattered throughout the world. 
If at any moment the price of any security represents a dif- 
ferent ratio to other goods from that which is in the mind 
of a certain observant citizen in Redlands, California, he 
can, by telegraph, buy or sell that security until, by in- 
creasing or decreasing his stock of that security, and corre- 
spondingly decreasing or increasing his command over stocks 
of other goods, he brings his subjective exchange valuation 
to an equality with that of the world as expressed in the 
market. 



190 ELEMENTARY PRINCIPLES OF ECONOMICS 

Of course few markets are so open and wide as the one just 
cited. Gold beyond question may be said to have a world 
market. While wheat has a more limited market, its 
market is so widely international that, to the European and 
American, at least, it seems like a world market. Of many 
things it could not be said with practical truth that they 
have a world, or even a nation-wide, market. The extent 
of any particular market must be discovered from a study 
of its particular condition, always remembering what it is 
essentially that constitutes a market. 

Market and Normal Value and Price. — Let us recur once 
again to our illustration. We now call attention to the 
fact that, to use the language of certain advertisements, 
" no questions were asked " as to the origin of Roe's or 
Doe's stock of bread or coffee. We take special care to 
emphasize this because an important economic distinction 
is based upon it. When we are inquiring what value or price 
will be registered in any market at any time, assuming only 
that we know what different quantities will be offered and 
demanded at various prices, without inquiring lohy such offer- 
ings will be made at those particular prices, we are concerned 
with the problem of market value or market price, which, as we 
have explained in other language, is always determined at 
the point at which demand and supply are in equilibrium, — 
in other words, at the point at which the greatest number of 
exchanges can be effected in the existing state of supply and 
demand. 

When, on the other hand, we begin to inquire where the 
stock came from, with what ease or difficulty it was brought 
to market, etc., it is obvious that we ask the question only 
because the answer will throw light on the probable future 
supply and the resulting future price. And when we 
seek to understand, not what is the value or price at any 



VALUE 191 

moment or for any short period, — within which the stock 
is little subject to increase, as for example a crop season, — 
but rather the ideal 'value or price likely to be realized or at 
least approximated in any period within ivJiich known condi- 
tions of supply will have opportunity to be reflected, ive are 
shifting our inquiry from the problem of market or short- 
time value or price to that of normal or long-time value or 
price. Normal, or long-time, value or price, then, is that 
ideal value or price — not necessarily measured by a long- 
time average of actual prices — around which market values or 
prices fluctuate, and to which they tend constantly to approxi- 
mate for any period toithin which any one set of conditions of 
supply may be expected to exercise a dominating influence. 

Normal Value further considered. — It is apparent that 
a study of normal value involves a study of the conditions 
under which various classes of commodities reach the market, 
i.e. the conditions of supply. The first result of an analytical 
study of these conditions is the discovery that goods can be 
classified, from this point of view, into three groups : (1) 
absolutely scarce goods; (2) monopolized goods; (3) competi- 
tively produced goods. To shorten our terms, we may 
describe the differing nature of the scarcity of the three 
classes by the phrases, (1) absolute scarcity ; (2) monopoly 
scarcity; (3) cost scarcity. The meaning of these terms 
will appear more clearly in what follows. 

The Value of absolutely Scarce Goods. — It should be 
clear now that determination of the normal value or price of 
absolutely scarce goods, such as 1804 silver dollars, or metal 
occurring only in some fallen meteor, does not differ signifi- 
cantly from the determination of their market value or price. 
Supply being fixed, we may say, with a rough sort of practical 
truth, that their value — normal or market — is fixed by 
demand. As Professor Marshall happily illustrates, it is 



192 ELEMENTARY PRINCIPLES OF ECONOMICS 

as though, when one blade of a pair of shears is fastened and 
immovable, we were to say that the cutting is done with the 
moving blade. 

A diagram may help the student to fix the matter in mind. 
Let OF be the axis of price or value, and OX the axis of 
quantity, and let DD' represent the state of demand for 
the commodity, since, as DD' illustrates, the demand price, 
as measured by the vertical distance between OX and DD', 
falls with every increase in the imagined offering, as measured 
by the distance from along OX. Then if the quantity of 
the commodity assumed to be on the market is fixed, the 
stock may be represented by the distance OS, in which case 
the value must be represented by the vertical line AS. 





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VALUE 193 

If we represent now an increased demand for the commodity 
by the curve //', it is clear that the new price would be rep- 
resented hy A'S. 

Monopoly Value or Price. — In the case of monopoly, 
supply rests on the will of the monopolist, as determined by 
economic considerations. Since monopolies and monopoly 
value form the subject matter of the next chapter, we 
omit any further treatment of the topic here, except in 
connection with the explanation of competitive cost value, 
which is to follow. 

Normal Value of competitively Produced Goods. — We 
need not here inquire to what extent competition is actual 
in the production and sale of goods in the modern industrial 
world. Even though it should be admitted that every 
branch of industry shows traces, large or small, of monopoly 
or of absolute scarcity, it is sufficient for our purpose to 
insist that, in a great part of present-day industry, some 
measure of competition is present to influence price policy. 
In considering the question of the determination of normal 
value or price under competition, we are really asking the 
question : How would price and value be established if com- 
petition loere perfect? The answer to this question we can 
use in deciding for ourselves how the price or value is actually 
established in any given industry, according to the relative 
influence of absolute scarcity, monopoly, and competition 
upon that industry. 

Now, when we take up the study of normal value or price, 
we find that here, as in all other cases of value, it is the de- 
mand of society that first of all determines the value or price. 
The laws of demand have been given elsewhere and ex- 
plained. Let us illustrate this by numerical examples and 
by diagram. We may assume that in any given period 
society's demand for a certain commodity is as follows: 
o 



194 ELEMENTARY PRINCIPLES OF ECONOMICS 

For 1,000,000 units, society will pay per unit $2.00 
" 2,000,000 " " " " •' •' S1.25 

•' 3,000,000 " " " " " '• $0.75 

" 4,000,000 " " " " " " $0.60 

and so, consistently, for other prices and quantities beyond 
and within these limits. It is, of course, obviously impracti- 
cable to take space for a table that would give a complete 
picture of demand. The accompanying diagram is here used 
to represent graphically the same assumed state of demand. 

As in our other figures, quantity is here measured along 
the OX axis, i.e. by distance from OY toward the right. 
The marginal intensity of desire, or rather the marginal 
intensity backed by purchasing power and measured in 
purchasing power, is represented by vertical distance above 
the OX axis, as registered along the OY axis. These two 
elements, quantity and marginal utility, are interdepend- 
ent variables. The greater the quantity, represented by 
horizontal distance toward the right from OY, the less the 
marginal utility, represented by vertical distance upward 
from OX. Hence the character of the line DD' which rep- 
resents the state of demand here assumed. It will be 
clear to the student on consideration that DD', as a demand 
curve, might have been drawn more nearly horizontal, and 
indeed that it might have been given any slant or combina- 
tion of slants, representing other possible states of demand, 
provided only that it be drawn to represent a continually 
diminishing marginal utility for every increase in quantity. 

With the table and the graph in mind, we are prepared 
to note that, in a very real fundamental sense, the purchasers 
always fix the price or value. In other words, it rests with 
society to say, for any quantity offered, what it will pay for 
a unit of that quantity. 

But price, though it is in every case determined by society, 



VALUE 



195 



depends, as just said, upon the quantity offered, and we 
must therefore now consider how the quantity offered in 
the market is determined, on the assumption of perfect 
competition. 



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Demand Curve 

In the chapter on the Factors of Production we have 
explained that at any given time there is a point in the invest- 
ment of labor and capital upon a unit of any natural agent 
beyond which further investment yields less than proportionate 
returns. If, then, we take the case of any commodity com- 
petitively produced, in which a natural raw material plays 
a determining part, it is evident that each producer and all 



196 ELEMENTARY PRINCIPLES OF ECONOMICS 

the competitive producers taken together will be subject to 
this law in putting their commodity upon the market. 

Let us illustrate such a situation again by numerical 
example and by a graph, and let us assume that the commod- 
ity is the same one for which we prepared above a schedule 
and a graph of demand. Let us assume that the thousands or 
even millions of producers of actual experience are here repre- 
sented by four producers, A, B, C, D, and that the expenses 
of production of these producers are severally as follows : 

A can produce 150,000 units at a unit expense of $0.25 
an additional 100,000 " " " " " $0.50 

50,000 " " " " " $0.75 

30,000 " " " " " $1.00 

40,000 " " " " " $1.50 

10,000 " " " " " $2.00 

B can produce 300,000 units at a unit expense of $0.25 

an additional 200,000 " " " " " $0.50 

100,000 " " " " " $0.75 

50,000 " " " " " $1.00 

60,000 " " " " " $1.50 

50,000 " " " " " $2.00 

C can produce 400,000 units at a unit expense of $0.25 
an additional 300,000 " " " " " $0.50 

200,000 " " " " " $0.75 

120,000 " " " " " $1.00 

150,000 " " " " " $1.50 

140,000 " " " " " $2.00 

D can produce 500,000 units at a unit expense of $0.25 

an additional 400,000 " " " " " $0.50 

300,000 " " " " " $0.75 

200,000 " " " " " $1.00 

250,000 " " " " " $1.50 

" " 200,000 " " " " " $2.00 

Combining these tables we get a supply schedule for all 
the assumed producers as follows : — 



VALUE 



197 



Vaeying Marginal Expense for Different Supplies 
1,350,000 at a marginal stated expense of S.025 



2,350,000 " 




" $0.50 


3,000,000 " 




" $0.75 


3,400,000 " 




" $1.00 


3,900,000 " 




" $1.50 


4,300,000 " 




" $2.00 



This table, or supply schedule, may be represented graphi- 
cally as follows : — 



$2.00 







1.75 



.2 1.50 



i^ 1.25 



1^ 



1.00 






.75 



r- .50 



.25 



.00 



Y 
















t 






































i 


I 






































/ 
















c 


















C^ 


/ 














rx 




^ 















S 


^^ 














X 



2 3 

Millions of Units Produced 

Supply Curve 



As in the graph of demand, quantity is here measured 
by horizontal distance to the right from axis OF. Here 
vertical distance above OX measures the marginal expense 



198 ELEMENTARY PRINCIPLES OF ECONOMICS 

of production, in terms of the money unit. SS' therefore 
describes the combined movement of the interdependent 
variables of quantity and marginal expense. 

And now let us superimpose the graph of supply upon the 
graph of demand as given above : — 



$2.00 
1.75 
1.50 



D1.25 



9, 1.00 



.75 



.50 



.25 



.00 



Y 


\ 


P 












i^ 








\ 




















\ 


\ 








y 


1 










\ 








/ 














\ 




/ 


/ 
















k 


Y 
















y 


/ 


V 


^^ 


£! 








^ 


^ 


^ 








' — 









---^ 














X 



2 3 

Millions of Units 

Supply and Demand 



The graph here pictures what a comparison of the demand 
and supply schedules shows, that at $.75 a unit 3,000,000 
units can be produced, and that at the same price of S.75 
a unit the market will take 3,000,000 units of the commodity. 



VALUE 199 

At this price each of the four producers is repaid for his 
expense in producing even his most expensive units. Here 
again we have had to simphfy our problem unduly by taking 
the average expense of a large number of additional units, as 
the marginal expense or the expense of the last unit. But 
the simplification is not at the expense of the truth we are 
here merely illustrating. 

Under the conditions we have here assumed, the normal 
supply of this commodity is 3,000,000 units, because that 
is the quantity which can he produced and put upon the market 
at a marginal expense not greater than society will pay for 
such a quantity, and $.75 is the normal value and price, 
because at S.75 society will take just that quantity which 
can be produced at a marginal expense of $.75. 

In discussing market price, we concluded by saying that 
market price is determined at the point of equilibrium of 
demand and supply. In the case of normal or long- 
time price of competitively produced goods, we can go a 
step farther and say that the normal value or price is 
that value or price which brings into equilibrium the di- 
minishing marginal utility with the marginal expense of 
production. 

We have taken for our illustration a product subject to 
the law of diminishing returns. The following graphs illus- 
trate in like manner the determination of competitive normal 
price on the assumption: first, that the marginal expense 
does not change with changes in the quantity produced, i.e. 
under conditions of constant expense, — and second, that the 
marginal expense diminishes with increase in quantity of 
total output, i.e. under conditions of decreasing expense or 
increasing returns. The second graph also illustrates the 
effect of increased demand upon price under the same con- 
dition of supply. 





\ 




















\ 


\ 




















\ 
















o 






\ 


s 










c' 










\ 










b 














^\ 


^ 


w 




















u 





o 

Y 



P 
Constant Expense 



X 

























I\ 


\ 
\ 

\ N 
















Sx 




\ 


\ 
\ 

\ 

K \ 




















N 




















N 


^ 








■ 


-S' 


^>^ 






** 










■^^ 


^ 


•*.~,_ 




















^E 


' 



o 



p P' 

Decreasing Expense 
200 



VALUE 



201 



With such tables and graphs as we have here given in illus- 
tration, the student may, if he will, find or illustrate many 
curious and interesting facts about value. Thus, to take but 
a single case, let us draw a graph to illustrate the effect of 
increased demand upon the normal value of a commodity, 
assuming the expenses of production to remain constant. 

Explanation of these diagrams 
is purposely omitted. 

It is usual to conclude a dis- 
cussion of the determination of 
competitive normal value with 
an explanation of certain actual 
conditions which in one way or 
another qualify the theory as 
here given and explained. We 
prefer merely to name some of 
the most important of these influ- 
ences, leaving it to the student to consider to what extent 
and in what way they qualify or contradict the general con- 
clusions above derived and explained. Chief among such 
" fridional elements," as they have sometimes been called, 
are custom, immobility of labor and capital, unequal taxation, 
planless production, and " by-products." 

In the following chapter we shall take up the problem of 
monopoly value or price, after first explaining what monopoly 
is and how it differs from competition. 




p p' 

Increased Demand and Con- 
stant Expense 



SUMMARY 

1. The term value in economics has various but related meanings. 

2. Subjective use value is the economic importance of a unit of 

any commodity to the one valuing it. 

3. Subjective use values are incommunicable. 

4. Subjective exchange value is the quantitative ratio between 

two subjective use values in the mind of the one who does 
the valuing. 



202 ELEMENTARY PRINCIPLES OF ECONOMICS 

5. Exchange results from differences in subjective valuations. 

6. Whenever two or more minds, entertaining different subjective 

exchange values, meet, the meeting of these minds constitutes 
a market ; in that market differences in subjective exchange 
values disappear by exchange, and the ratio of the exchange 
is the objective exchange value in that market. 

7. The word value, standing alone, usually means objective ex- 

change value, — the quantitative ratio in which any two 
goods or services are exchanged. 

8. Price is objective exchange value expressed in terms of 

money. 

9. Market value is the actual value in any market at any moment 

of time ; it is always determined at the point where demand 
and supply are in equilibrium. 

10. Normal value is the ideal value toward which market values 

tend during any period within which known conditions of 
supply can exercise a dominating influence. 

11. Goods may be classified from the point of view of their supply, 

as absolutely scarce goods, monopoly goods, and freely pro- 
duced goods. 

12. The normal value of absolutely scarce goods may be said to be 

determined by demand. 

13. Freely produced goods may be increased in quantity : (1) at 

an increasing unit cost; or (2) at a constant unit cost; or 
(3) at a decreasing unit cost. 

14. In every case the normal value will stand at the point where 

marginal utility equals marginal cost. 

15. So-caUed frictional elements, — which obscure or modify the 

general principles of value, — include custom, immobility 
of labor and capital, unequal taxation, planless production, 
and "by-products." 

QUESTIONS FOR RECITATION 

1. Define subjective use value; subjective exchange value; ob- 

jective exchange value ; price ; market. 

2. Show the relation of the three ideas of value just defined. 

3. Distinguish the three conditions of supply of goods. 

4. Distinguish the three conditions under which the supply of 

"freely produced" goods may be increased. 

5. Draw a graph to illustrate (a) social demand ; (fc) supply of a 

commodity produced at constant cost. 

6. At what point is market price determined? normal price of 

freely produced goods? 



VALUE 203 

QUESTIONS FOR STUDY AND DISCUSSION 

1. What is the derivation of the word value? What are some of 

the meanings of the word outside of economics? Is there 
any common content of all the uses? 

2. Is friendship or love capable of subjective valuation? of objec- 

tive valuation? 

3. Name some absolutely scarce goods ; monopolized goods ; freely 

produced goods. 

4. Name some goods that are produced under conditions of in- 

creasing cost ; decreasing cost. 

5. Is a universal rise in subjective use values conceivable ? in subjec- 

tive exchange values ? in objective exchange values ? in prices ? 

6. How does an increase of demand for cotton affect the price of 

cottonseed oil? How would you expect to see the price of 
gasoHne oil affected by a considerable reduction in the price 
of automobiles? 

7. Is mutton or wool the by-product in sheep-growing? Is the 

ease everywhere the same? 

LITERATURE 

Clark, J. B. : The Distribution of Wealth, Ch. XIX. 
Jevons, W. S. : Theory of Political Economy, Chs. Ill and IV. 
Marshall, A. : Principles of Economics, Bk. V, Ch. Ill, 5. 
Smart, W. : Introduction to the Theory of Value, Chs. V and X. 



CHAPTER III 
MONOPOLIES AND MONOPOLY VALUE 

In the preceding chapter we reached the conclusion that 
in the case of goods freely produced under competitive condi- 
tions, value is determined or fixed at the point where the 
marginal cost equals the marginal utility of the supply. At 
the same time it was pointed out that not all goods are thus 
produced. The largest and most important class of such 
exceptional goods consists of those produced by monopolists. 
In order to complete our theory of value, therefore, we must 
now inquire how monopoly value is determined ; and, that 
we may do this the more understandingly, let us first see 
what monopoly is. 

Definition and Classification. — It will be well for the 
student to study carefully the following definition, weighing 
deliberately the several words and phrases : Monopoly means 
that substantial unity of action, on the part of one or more 
persons engaged in some kind of business, which gives exclusive 
control, more particularly, although not solely, with respect to 
price. 

Writers on the subject of monopoly have made many 
classifications, varying with the point of view from which the 
classification is approached. The following, which is rather 
a classification of the sources of monopoly power than of 
monopolies, will, it is believed, prove especially helpful in 
explaining the origin and real nature of actual monopolies. 

204 



MONOPOLIES AND MONOPOLY VALUE 205 

A. Social Monopolies. 

I. General Welfare Monopolies. 

1. Patents. 

2. Copyrights. 

3. Trade-marks. 

4. Public consumption monopolies. 

5. Fiscal monopolies. 

II. Special privilege monopolies. 

1. Those based on public favoritism. 

2. Those based on private favoritism. 

B. Natural Monopolies. 

I. Those arising from limitation of supply of raw 

material. 
II. Those arising from peculiar characteristics of the 
business itself. 
III. Those arising from secrecy. 

Social Monopolies. — Businesses are social monopolies 
in so far as they are made monopolies not by their own char- 
acteristics, but either by legislative enactment or by forming so 
close a connection with great natural monopolies that they 
partake of the nature of the latter. 

In old times kings and queens frequently granted exclusive 
business privileges to favored persons, and permitted no 
one except those named to engage in such undertakings. 
Such monopolies, however, became so odious that sovereigns 
were compelled to cease granting them. Governments 
still create exclusive privileges by patent and copyright laws, 
but they do so in behalf of the general public. Authors 
and inventors are given exclusive rights over their produc- 
tions for a limited period. These monopolies are believed 
to have justified themselves through the stimulus which 
they have given to invention and authorship. Yet it must 



206 ELEMENTARY PRINCIPLES OF ECONOMICS 

not be forgotten that all intellectual achievements are in 
part a social product, — that they are due in great measure 
to earlier achievement. The telephone was preceded by a 
century of scientific invention and discovery along the line 
of sound transmission, and most of that investigation was 
very ill rewarded. On the whole, experience seems to justify 
the conclusion that patents and copyrights are beneficial, 
but that patents do not rest on so strong a basis as do copy- 
rights, since no two persons could ever write precisely the 
same book. 

The trade-mark is a legal monopoly similar to the patent 
and the copyright, and, in fact, is itself a copyright. It is 
given a separate place here because of its peculiar importance 
in modern business. In connection with lavish advertising, 
trade-marks in recent days have been made the basis of 
enormous profits. 

Public consumption monopolies and fiscal monopolies 
call for a word of special comment. They can be distin- 
guished only by knowing the object which the government 
has in view in establishing them. If the government manages 
for itself or grants to another a monopoly of the liquor traffic 
with the object of regulating the consumption, the monopoly 
is a public consumption monopoly. If, on the other hand, 
the chief object is not regulation but income, the monopoly 
is a fiscal one. Often the two objects are so blended that 
it is difficult or impossible to name the resulting monopoly. 

Our classification names two kinds of special privilege 
monopolies." Those monopolies that are due to special 
tariff advantages or to other legislation are rightly said to 
be based on public favoritism. The other class of special 
privilege monopolies consists of those that grow up through 
special favors granted by other monopolies, especially nat- 
ural monopolies, such as railways. 



MONOPOLIES AND MONOPOLY VALUE 207 

Natural Monopolies. — Natural monopolies are those that 
depend for their existence on circumstances or conditions within 
the businesses themselves rather than on the will or consent of 
society. They grow up independently of the social will and 
desire and sometimes even in direct opposition to it. The 
words we have used in our classification will sufficiently 
explain the different sources from which they arise. By far 
the most important of all monopolies are those of the second 
class of natural monopolies, chief among which are the follow- 
ing : wagon roads and streets, canals, docks, bridges and 
ferries, waterways, harbors, lighthouses, railways, tele- 
graphs, telephones, the post office, electric lighting, water- 
works, gasworks, street railways of all kinds. The peculiar 
characteristics that always give rise to monopoly of this 
class are indicated in the following statement : Whenever 
there is a decided increment in gain resulting from combination, 
there results a tendency to monopoly which overcomes all 
obstacles. This decisive increment of gain from combination is 
always present in businesses (a) that occupy peculiarly favor- 
able spots or lines of land, and (b) that furnish services or 
commodities which must be used in connection with the plant. 

Of late years many economists have argued that monopoly 
may naturally arise without any of the advantages here 
indicated, through the superior power of great capital and 
the superior economy of great concentration. They would 
call such monopolies capitalistic. There is not space to give 
all the reasons for dissenting from this conclusion regarding 
so-called capitalistic monopolies. One or two very cogent 
reasons may, however, be stated. An exhaustive study of 
the cases cited in support of this alleged tendency to monop- 
oly has failed to reveal a single one in which the monopoly 
did not enjoy one or many of the monopoly advantages that 



208 ELEMENTARY PRINCIPLES OF ECONOMICS 

we have already mentioned and explained. Moreover, 
many cases in which the possession of large capital seemed 
on the surface to be a dominating influence have been cases 
in which the monopoly was so short-lived as to furnish little 
support to the argument of those who cited them. After 
all, whatever may be the advantage conferred by large capital, 
we must remember that capital is so plentiful that one 
gigantic plant can always find a rival whenever a slight 
margin of profit invites its establishment. 

Our conclusion, then, may be stated as follows : There is 
a great and growing field of industry in which competition 
is not natural or permanently possible, for reasons explained 
in the text ; there is another field within which monopoly 
may easily be engendered by unwise social action, and which 
is likely to become narrower as the nation grows in intelli- 
gence and thoughtfulness ; and finally there is a third field 
within which natural monopoly does not and cannot exist, 
and within which social monopoly is unlikely to arise. 

The First Law of Monopoly Price. — And now, having seen 
what monopoly is, we may attempt an answer to the ques- 
tion. How is monopoly value or monopoly price determined ? 

First of all, we may say that monopoly value, like all 
objective exchange values, is determined by the relation 
between demand and supply, and that demand is here as 
elsewhere determined by marginal utility. The supply, 
however, is not here determined as under competition at the 
point of marginal cost, but at the point where the monopolist 
will secure the maximum of net revenue possible in the existing 
state of demand. In other words, the monopolist, freed from 
competition and governed only hy the consideration of demand, 
is able to adjust supply to demand in such a way that the price 
will stand at the point of highest net return. This may be 



MONOPOLIES AND MONOPOLY VALUE 209 

called the laic of monopoly price from the point of mew of supply. 
In determining what quantity shall be supplied and hence 
what shall be the resulting price as fixed by the demand of 
the public, — in other words, what is the point of highest 
net returns, — the monopolist consciously or unconsciously 
proceeds according to the following principles : — 

1. He realizes that every increase in the offering of his 
monopolized product will result in lowering the marginal 
utility, and hence the demand price of the product, while 
every decrease in the offering will result in a higher marginal 
utility, and hence a higher price. 

2. Of the expenses of production there are some that vary 
in their aggregate in almost regular proportion with the 
variation in the supply. Thus if the product is doubled, the 
total cost of raw material will be just about doubled. Such 
expenses are called variable expenses. 

3. Other expenses, within certain limits, remain more 
nearly the same in their aggregate, no matter what the amount 
of the product. These, called the fixed expenses, would in- 
clude the cost of plant, salary of superintendent, interest 
on bonds, etc. The student should note that the expenses 
here called variable are variable only in their aggregate, the 
expense per unit being rather constant or invariable while 
those expenses that are called fixed are really variable for 
the unit of product, being constant or fixed only in the aggre- 
gate. Thus, while the total expense represented by bond 
interest is fixed or invariable, and is classed under fixed 
expenses, the amount of interest chargeable to any unit of 
product decreases with every increase of output. 

It follows from the above principles that the monopolist, 
since he is seeking the maximum net revenue from his 
business, will pay no attention to fixed charges in establishing 
the price of the product, but will consider only the variable 



210 ELEMENTARY PRINCIPLES OF ECONOMICS 

expenses in connection with the probable demand for his 
goods at various prices. 

An Illustration. — We may illustrate by an example the 
operation of these principles. The following table shows in 
parallel columns the number of sales of a monopolized good 
at different prices : the total resultant earnings ; the variable 
expenses ; the fixed expenses ; the total expenses ; and finally 
the net revenue or monopoly profit : — 



Price 

PER 

Unit 


Number • 
Sales 


Total 
Earnings 


Variable 
Expenses 
PER Unit 


Total 

Variable 
Expenses 


Fixed 

Expenses 


Total 
Expenses 


Net 
Revenue 


$.10 
.09 
.08 
.07 
.06 
.05 
.04 


600,000 
800,000 
1,200,000 
1,800,000 
2,500,000 
3,500,000 
5,000,000 


$60,000 

72,000 
96,000 
126,000 
150,000 
175,000 
200,000 


$.03 
.03 
.03 
.03 
.03 
.03 
.03 


$18,000 
24,000 
36,000 
54,000 
75,000 
105,000 
150,000 


$50,000 
50,000 
50,000 
50,000 
50,000 
50,000 
50,000 


$68,000 
74,000 
86,000 
104,000 
125,000 
155,000 
200,000 


-$8,000 
- 2,000 
+ 10,000 
+22,000 
+25,000 
+20,000 
+ 0,000 



Study of the table will show why, in the case assumed 
here, the monopoly price will stand at six cents. Competi- 
tion, if it were present, would keep on increasing the supply 
as long as normal profit could be obtained. In our illus- 
tration the lowest price at which production could be carried 
on would be four cents ; and four cents would therefore be 
the competitive price or the price determined by the balanc- 
ing of marginal utility against marginal cost of production, 
assuming -that the weakest competitor in the business would 
merely be repaid for all expenses incurred. Other com- 
petitors, more efficient, and therefore producing a large 
part of their product at less expense, could still derive a 
profit at this price. But since the monopolist has such con- 
trol over the production that he can control the offering to 



MONOPOLIES AND MONOPOLY VALUE 211 

the market, he will cut off production at 2,500,000 units, at 
which point the marginal utility, and hence the demand, 
will fix a price of six cents, and will give the largest net 
return, $25,000. 

The student may be interested in seeing the facts shown in 
the above table presented in graphic form. This illustrates 
only one of several possible cases, that in which the monopo- 
list is producing a commodity, the making of which falls 
under the law of decreasing costs per unit as the output is 
increased. Such a condition is most favorable to the es- 
tablishment of monopoly. But monopoly can also exist under 
conditions of constant and increasing cost per unit. 

The diagram on page 212 shows the gross sales, total 
expenses, and net profits which would result at three differ- 
ent prices at which the monopolist might choose to sell the 
product. If the monopoly fixes the price at 4^ cents, its 
total sales would equal the area of the rectangle JKPO, while 
its total expenses of production would be represented by the 
rectangle LMPO. Similarly, at the selling price of 6 cents, 
rectangle EFRO would equal the total sales and GHRO 
the total expenses; while, at a price of 8 cents, the same 
facts would be illustrated by rectangles ABNO and CVNO 
respectively. But the monopoly is not so much interested 
in gross sales or gross expenses as in total net profits. Evi- 
dently, the profit per unit is represented by the vertical dis- 
tance between the supply and demand curves. But total 
profit depends not only upon the gain per unit but also upon 
the number of units which may be sold. The products of 
these quantities, at 8, 6, and 4|- cents respectively, are shown 
by the rectangles ABCV, EFGH, and JKLM. It is to the 
interest of the monopoly to make this rectangle of profits 
just as large as possible. 

If the monopolist fixes the price at 4^ cents, he can sell 



212 ELEMENTARY PRINCIPLES OF ECONOMICS 



4,200,000 units and the profits are represented by rectangle 
JKLM. If, however, he raises the price to 6 cents, though 
he can dispose of only 2,500,000 units, his net gain, as shown 



12 

11 

10 

^9 

C 

g 8 

:a 

>■ 4 
3 
2 
1 



^ 








1 
















\ 
\ 


\ 






















] 


\ 
























\ 
























\ 


\B 




















A 






N^ 


















C 










/ 














E 
G 




1 ' 

i 




F 


^ 


^ 












J__ 





-h - 





^o^Z 


- -cS; 


L^"^ 


^"^--17 ~ 


fe^r~ — - 








L 




j 












iVii 





























































1 






R 






]P 






X 


( 


3 


] 


L 


J 


) 




J 


4 




F 


> 


6 



Number Unit (in millions) 

by rectangle EFGH, is materially increased. Thus en- 
couraged, the monopolist might try placing the price still 
higher at 8 cents, but, in this case, he will have overreached 
himself; for at this price society will take only 1,200,000 
units, and the net profit rectangle ABCV is therefore much 



MONOPOLIES AND MONOPOLY VALUE 213 

smaller than EFGH, which represents the net gain at a 
price of 6 cents. Evidently, then, the monopolist will, in 
this state of demand and supply, attempt to keep the price 
in the neighborhood of 6 cents per unit. 

The student will find it an interesting and valuable exercise 
to draw similar graphs of monopoly price determination for 
commodities produced (a) under conditions of constant 
expense and (6) under conditions of increasing expense. 

The Effect of a Tax. — Our numerical illustration and our 
diagram may both be made to convey a lesson regarding the 
influence of taxation upon monopolies and monopoly price. 
Fixed expenses have no influence in determining the price. 
If, therefore, a fixed tax, say of $5000 a year, were to be laid 
upon this monopoly, it would not result in an increase of 
price. A study of the table will show that, with such a tax, 
the net revenue at price .08 would be $5000 ; at price .07, 
$17,000; at price .06, $20,000; at price .05, $15,000; at 
price .04, —$5000. The reason for this is that a fixed 
tax would become for the monopoly a part of its fixed ex- 
penses. Thus the price .06 will still be the point of maximum 
net revenue and hence the monopoly price. On the other 
hand, a variable tax, for instance a tax of one cent per unit, 
would result in this case in raising the monopoly price. In 
our illustration, such a tax would make the net revenue 
at the price .08, - $2000 ; at the price .07, $4000 ; at the 
price .06, nothing ; at the price .05, - $15,000. Thus, though 
the monopoly would find its profits greatly curtailed by 
such a tax, consumers would be compelled to pay one cent 
more per unit for the monopoly product. The possible 
advantage which society might draw from the tax would 
therefore be wholly or in part offset by the increased price 
which the public would have to pay for the commodity. 
Such a raising of the price will not take place, however, if 



214 ELEMENTARY PRINCIPLES OF ECONOMICS 

the demand at the higher price is not sufficient to make as 
great a net revenue as at the lower price. We may conchide, 
therefore, that fixed taxes, or taxes on the net revenue of a 
monopoly, cannot be shifted ivholly or in part by a change in 
price ; while taxes laid in proportion to the amount of business, 
sinxie they contribute an addition to the variable expenses, may 
be wholly or in part shifted by a change in price. 

If the diagram be again used for illustration, it may easily 
be seen that any fixed tax must be subtracted from the 
rectangle representing net profits. It is evidently to the 
advantage of the monopolist to deduct such a tax from the 
largest rather than from one of the smaller rectangles. On 
the other hand, a tax of one cent per unit of output would 
raise the line representing the expense of production per 
unit by a like amount throughout its whole length. This 
would entirely change the shape and area of the various 
profit rectangles and in the case here considered would make 
the maximum net profit rectangle appear at the price .07. 

The Second Law of Monopoly Price. — It is sometimes 
said that the price of a monopolized good depends solely 
upon the will of the monopolist. In the strict sense of the 
phrase this is not true. As our explanation has shown, the 
monopolist is forced by economic motives to establish such a 
price as will give the maximum net revenue. There are 
certain conditions on the side of demand which therefore 
have a decisive influence in determining monopoly price. We 
may group the most important of these in a general state- 
ment which may properly be called a law of monopoly price 
from the point of view of demand. The greater the intensity 
of customary use of the monopolized commodity or service, the 
higher the general average of economic well-being, and the more 
readily wealth is generally expended, the higher will be the 
monopoly price which will yield the largest net returns. Thus 



MONOPOLIES AND MONOPOLY VALUE 215 

monopoly, without any effort of its own, shares in the in- 
creasing wealth of a country, and absorbs a considerable part 
of it. It is, for example, among other influences, the larger 
wealth and the greater willingness to spend freely that make 
monopoly more profitable in the United States than in 
Germany or other European countries. The search for 
other illustrations of the law should prove an interesting 
and valuable exercise for the student. 

In our discussion of monopoly price up to this point cer- 
tain assumptions have been tacitly made, which it is well 
now to state and briefly discuss. We have been assuming 
that the monopolist, in forming his price policy, is actuated 
solely by desire to get the greatest money return; that he 
is willing to disregard unfavorable public opinion except in 
so far as such public opinion would influence demand for his 
commodity ; that he knows definitely the expense, per unit 
and aggregate, for his different possible offerings to the 
market, and with equal definiteness what the public will 
pay per unit for different possible offerings. It is of course 
in the highest degree improbable that any one of these 
assumptions is completely true for any monopolist. Regard 
for the good opinion of his fellows may possibly lead a monop- 
olist to get less money from them than his monopoly power 
makes possible. On the other hand, he may brave public 
opinion in making his money in the expectation that he can 
win back the approval of the public by a lavish and spectac- 
ular philanthropic expenditure of his monopoly gains. 
Public opinion may find expression in legislation that will 
limit his monopoly power. Again, such knowledge of the 
state of demand as has been assumed is perhaps never pres- 
ent in real life, though some monopolists seem to have an 
almost uncanny knowledge of this factor. In so far as our 
assumptions are unreal in the case of any monopolist, to 



216 ELEMENTARY PRINCIPLES OF ECONOMICS 

that extent will the actual monopoly price be below or above 
the one indicated by our analysis. How far the assumptions 
are unreal must be discovered in each case from careful study 
of the particular circumstances of that case. 

Natural Monopolies of Class Two. — It was long ago said 
by a shrewd English engineer that where combination is 
possible, competition is impossible. Now combination is 
always possible in the case of natural monopolies of the 
second class. Indeed, combination in such businesses is 
inevitable. If two gas companies in a city, each with a 
capital of a million dollars, are able without combining to 
make 10 per cent profits, they will, when combined, make 
much more than 10 per cent. The force drawing them to- 
gether works as constantly, if not as uniformly, as the attrac- 
tion of gravitation. 

The testimony of experience on this point is ample. There 
is never any sustained competition in this field. There is 
sometimes " war " to settle the terms of combination, and 
popular language, when it uses the word " war " in this 
connection, as in speaking of gas wars, etc., is scientifically 
correct. And yet, even to-day, after nearly a century of 
conclusive experiment, it frequently happens that a city 
is led by lavish advertising to believe that a new and " in- 
dependent " telephone company, for example, will perma- 
nently lower charges and will remain independent. What, 
then, should be the policy of the government in dealing 
with these industries? Ought we in the United States to 
substitute, government ownership and management of such 
monopolies for private ownership and management? Some 
of these monopolies have been in public hands so long that 
we no longer think of them as a possible field for private 
enterprise. Such, for instance, are the roads and streets, 
the post office, and, in many places, the canals. As to the 



MONOPOLIES AND MONOPOLY VALUE 217 

others, it would at least be well to limit the charters and to 
make such a reservation of public rights, including the right 
of future purchase on fair terms, as will later permit the 
government easily and readily to make su,ch changes as 
accumulating experience may show to be wise. In an earlier 
chapter on the Industrial Stage in the United States, we 
have already given some consideration to the history of 
pubHc policy in relation to these monopolies, postponing 
to the present point the argument usually offered in favor 
of the policy of public ownership. 

Advantages claimed for Public Ownership. — The princi- 
pal advantages claimed for public ownership of such monop- 
olies are as follows : — 

1. Increase and Diffusion of Public Prosperity. — A general 
diffusion among the community of the great incomes now 
reaped by the private monopolies will tend to prevent an 
undue concentration of wealth while at the same time pro- 
moting general prosperity. Most of the enormous fortunes 
of our country have sprung directly from natural monopolies 
in private hands. It should be noted that if such private 
monopolies are taken over by the government, the income 
from them may be diffused in either of two ways. Charges 
may be placed so low that the price will simply cover cost 
without allowing for profits, — the method pursued by our 
post office, and by the English telegraph service ; or a profit 
may be derived from the industries, and this profit may then 
be used to lower taxes or to benefit the people in other ways. 

2. Economy and Efficiency. — How enormous is the waste 
in attempted competition in the field of natural monopo- 
lies may be seen on every side. Indeed, it was some years 
ago estimated, possibly with some exaggeration, that, in 
railway construction and operation in the United States 
during the preceding half century, economic resources had 



218 ELEMENTARY PRINCIPLES OF ECONOMICS 

been wasted which, had they been economically applied, 
would have been sufficient to build comfortable homes for 
all the men, women, and children then in the country. There 
is a large basis of reason in the claim of those who maintain 
that public ownership of such monopolies would be more 
economical than the policy of private ownership and manage- 
ment has been. 

When services of a monopolistic nature are performed by 
the public, great economies can often be secured by com- 
bining various services, such as water, gas, and electric 
lighting. Moreover, a better management is likely to result. 
It is only a popular superstition, now apparently passing 
away, that private enterprise is always and everywhere 
superior to public enterprise. The fact of the matter is that 
each should be superior in its own natural field. 

Nor is it true that private enterprise always excels public 
enterprise in the matter of initiating improvements. The 
American post office blazed the path for American express 
companies in developing the money-order business. The 
English Postal Savings Bank set a pattern for private savings 
banks in the establishment of branches and in the use of 
stamps posted on small cards for savings. In recent years 
many great technical improvements have come from the 
managers of public monopolies. 

3. Purification of Politics. — Private monopolies must be 
controlled by public authority; but control means inter- 
ference with private business, and interference begets 
corruption: Scarcely a year passes that the country is not 
shocked by the disclosure of bribery and corruption in con- 
nection with the granting or ejctension of franchises, or in 
some one of the many ways by which monopoly in private 
hands seeks to secure privileges, to free itself from duties, or 
to escape from deserved punishment. A lawyer prominently 



MONOPOLIES AND MONOPOLY VALUE 21g 

identified with monopolistic concerns has declared in a 
public address that the " ante-natal tax " which such com- 
panies are obliged to pay, — that is, the bribery necessary 
for securing franchises, — constitutes a regular element in 
the expenses of their business. This is one reason why our 
city governments are expensive. With public ownership 
and management of such monopolies, public interests and 
private interests are identified, and the best citizens can offer 
undivided allegiance to the cause of good government. 

In the decade 1900-1910 the American people came to 
know, as never before, the extent and variety'- of corruption 
practiced by private ovv^ners of great natural monopolies. 
Thanks to the so-called " muck-rakers," scandal followed 
scandal in claiming the outraged interest of the public. A 
point was reached where the old story of Diogenes and his 
lantern could provoke only a rueful smile. The result has 
been a great deal of legislation, — briefly discussed in an 
earlier chapter, — designed to secure adequate regulation of 
private monopoly by public commissions and otherwise. 

4. Will Overthrow Injurious Social Monopolies. — There 
seems to be general agreement that the social monopolies 
which rest on patents and copyrights are advantageous to 
the public. Trade-mark monopoly, public consumption 
monopoly, and fiscal monopoly, on the other hand, are forms 
of social monopoly that are not so generally accepted with- 
out question. Finally special privilege monopolies of class 
one are losing in public support, while special privilege monop- 
olies of class two are now everywhere admitted to be dis- 
tinctly injurious to the best interests of society. Some of 
these injurious social monopolies have been made possible 
by special favors received from the natural monopolies now 
under consideration; as, for example, by receiving lower 
freight rates than competitors could secure. If all citizens 



220 ELEMENTARY PRINCIPLES OF ECONOMICS 

could be assured just and equal treatment at the hands of 
natural monopolies, the limits of competition would be ex- 
tended, while the limits of monopoly would be restricted. 
But it is problematical whether such just and equal treat- 
ment can be hoped for while natural monopolies are in 
private hands. 

Jevons's Criteria. — The English economist Jevons, as a 
result of careful study of government management of monop- 
olies, reached the conclusion, in his " Methods of Social 
Reform," that there are certain general principles or char- 
acteristics by which we may judge what monopolies the 
state may most safely undertake to manage. These char- 
acteristics may be briefly summarized as follows : — The busi- 
ness (1) should need a single, all-extensive system for eflScient 
operation ; (2) should be of a routine nature, as, for example, 
is the business of the post office ; (3) should be of such a 
nature as to be subject to constant public scrutiny and criti- 
cism; and (4) should require a relatively small amount of 
capital expenditure in proportion to the amount of business 
done. 

As regards these criteria, it may be observed in the first 
place that they afford information only as to what businesses 
the state is most likely to conduct with success, — such success 
or failure, moreover, being here regarded solely from the 
point of view of the private business manager. In other 
words, there is no place in this statement of principles for 
the consideration that the state may promote the social 
welfare by" managing business at what, in the language of 
the private entrepreneur, would be called a loss. Our public 
highways are almost everywhere state-managed monopolies, 
created and maintained by taxation, not by fees or tolls. 
Judged solely by the standard of private management, 
therefore, they do not constitute a successful business. Yet 



MONOPOLIES AND MONOPOLY VALUE 221 

no one to-day would advocate a change in public policy which 
alone could make their management " successful." 

In the second place, it may be observed that although we 
may be unwilling permanently to restrict the state's activity 
within the " ring fence " thus set up, yet we may well use 
Jevons's criteria as an aid in determining the order in which 
the state should assume the management of natural monop- 
olies. Furthermore, it will appear on reflection that differ- 
ences in the degree to which various natural monopolies now 
conform to these criteria are not permanent, but are ever 
changing. Thus the railway business is becoming more and 
more susceptible to routine management; the need for 
its service becomes every day more widespread; it falls 
more and more under the intelligent criticism of the public. 
We may, therefore, question whether, judged even from 
the point of view of private business, all natural monop- 
olies may not in time be successfully managed by the 
state. 

Conclusion. — The advantages that might result from 
public ownership of natural monopolies of class two have 
been explained. While recognizing these, we must not 
overlook the enormous difficulties in the way of government 
ownership and control, — the serious problems of govern- 
mental organization involved, the problem of improving 
the civil service until men of superior capacity find permanent 
and attractive careers in the service of governments; of 
securing greater honesty and efficiency in the public business. 
In the case of government railways would arise the problem 
of rates and of the conflicting demands of different sections 
and industrial interests. In European countries these 
difficulties have proved very grave, and are still far from final 
solution, as indeed is the case in our own country with pri- 
vate ownership and management. 



222 ELEMENTARY PRINCIPLES OF ECONOMICS 

The most hopeful advocate of public ownership of such 
monopohes would probably admit that it will be a long time 
before all natural monopolies pass out of private hands. 
Meanwhile, there will remain the ever perplexing question 
of regulating the granting, extension, and renewal of fran- 
chises, and of the public control over such undertakings. It 
would take us too far afield even to mention all the difficult 
and perplexing questions arising from the attempt to control 
these natural monopolies. Especially within the past few 
years have the legislatures and courts of state and nation 
been confronted by these perplexities, which seem to grow 
more bafHing with every year. To take but the single 
instance of price or rate control, it is clear that state and 
federal commissions, legislatures, and courts are facing a 
problem of the utmost difficulty, if, indeed, the problem is 
not absolutely insoluble. Shall state or federal commissions 
exercise final authority in fixing or limiting rates charged on 
traffic within the bounds of the single state? How shall 
such rates be fixed or limited, — on the basis of " cost of 
service," value of commodities carried, or on the principle 
of charging " what the traffic will bear " ? Assuming any 
one of these bases, shall the railways be permitted to charge 
rates that will always return a profit, even in times of war 
or industrial depression? What is a reasonable profit to 
allow the roads? Is an increase in the value of their road- 
beds, due to increasing population, to be counted as part of 
their " investment," with the result of raising rates to shippers 
and final consumers? If the public determines rates, must 
it also interfere in the matter of wages of employees, on which 
rates must in part rest ? If the public is driven to interfere 
in regulating wages and conditions of employment of rail- 
way employees, shall the men continue to have the right 
to strike? Such questions as these could be multiplied to 



MONOPOLIES AND MONOPOLY VALUE 223 

fill many pages of this text. New ones are rising year by 
year. Indeed, no sooner does one of them seem about to 
be answered, than it in tm-n raises another. These ques- 
tions were never more urgent than they are now in our 
present troubled times. 

SUMMARY 

1. The essential idea in monopoly is unity of action, leading to 

control of price and other conditions. 

2. Monopoly value differs from competitive value in that the 

supply of monopoly goods is not determined by cost of pro- 
duction. 

3. Monopoly price is the price of maximum net revenue. In 

establishing the supply and the price, the monopolist dis- 
regards fixed expenses ; hence a fijced tax on monopoly can- 
not be shifted. 

4. Monopoly price is controlled on the side of demand by the 

wealth and purchasing habits of consumers. 

5. It is claimed in favor of public ownership of natural monopolies 

that the policy diffuses prosperity, is economical, purifies 
politics, and overthrows injurious social monopolies. 

6. Jevons's criteria of public ownership are : need of a single, aU- 

extensive system for efficient operation ; routine nature of 
business; openness to public inspection; small fixed capital 
expenditure. 

QUESTIONS FOR RECITATION 

1. Define monopoly. Name and define the different classes of 

monopoly. Mention some monopolies of which you have 
knowledge, and explain what monopoly advantages they enjoy. 

2. Sum up in a brief statement the peculiar characteristics of 

natural monopolies of the second class. Mention some 
monopolies of this class. 

3. Show by a numerical Ulustration and by diagram how monopoly 

price is determined. Explain the difference between monopoly 
price and competitive price. 

4. Explain differences in the effect of different methods of taxation 

of monopolies. 

5. What advantages are claimed for public ownership of natural 

monopolies ? What difficulties are involved in such a policy ? 

6. State the law of monopoly price from the side of supply ; from 

the side of demand. 



224 ELEMENTARY PRINCIPLES OF ECONOMICS 



QUESTIONS FOR STUDY AND DISCUSSION 

1. How far has the price policy of the Standard Oil Company been 

influenced by public opinion? by law? How near to the 
pure monopoly price has the company usually come? 

2. Is it better for the American people to pay lower prices for their 

goods, or to pay monopoly prices, assuming that part of the 
monopoly profits will be devoted to establishing educational 
institutions, pensions for college teachers, bureaus for sani- 
tary research, and the like, at the will and pleasure of the 
monopolist ? 

3. What result would you predict, when a city taxes a street rail- 

way monopoly a fixed annual amount on each ear operated? 

4. Is political corruption in city and state and nation, — so far as 

such exists, — an argument for or against public ownership 
of natural monopolies? 

5. "Private monopoly is always indefensible." Would you qualify 

this statement? 

6. Explain what is meant by the statement that the monopolist 

charges the highest possible price. Qualify the statement. 

LITERATURE 

Bemis, E. W. : Municipal Monopolies, pp. 660-680. 

Brown, W. J. : The Prevention and Control of Monopolies. 

Ely, R. T. : Monopolies and Trusts, Ch. Ill, pp. 102-104, also 

Ch. VI, pp. 229-231. 
Hobson, J. A. : Evolution of Modern Capitalism, pp. 156-160. 
Jenks, J. W. : The Trust Prohlem, pp. 24, 43, 53, 98. 
Jevons, Wm. Stanley : Methods of Social Reform, pp. 279-280. 
Report of the United States Industrial Commission, Vols. I and 11. 



CHAPTER IV 
MONEY 

Having discussed at length the fundamental principles 
on which exchange and value rest, we pass naturally to con- 
sider the nature of the complex mechanism by which exchange 
is effected. At the very center of this mechanism stands 
money, the medium of exchange. We have already in our 
historical study explained how from the custom of making 
gifts men passed to regular exchange by barter, how from bar- 
ter everywhere grew up the regular use of some one thing 
or some few things as means of making exchanges. With 
the handicraft stage men had come to use the precious metals 
for this purpose, and money, in the modern sense of the word, 
thus became a regular institution. 

The Definition of Money. — But what is money? When 
we come to define the word, we find that usage is by no means 
uniform. It is often convenient to use the 'popular and more 
general meaning of the term, according to which money is 
anything that passes freely from hand to hand, as a medium 
of exchange, and is generally received in final discharge of debts. 
But there is a narrower conception based upon the functions 
which money fulfills in the modern economy. In the first 
place, (1) we find that money everywhere serves as a medium 
of exchange. This, the first function to be developed, is 
everywhere the principal function of all kinds of money. 
Our present civilization would be impossible without money 
as a medium of exchange. Without such a medium, a man 
Q 225 



226 ELEMENTARY PRINCIPLES OF ECONOMICS 

with a horse who wanted a coat would be obliged to hunt for 
a tailor who wanted a horse, and even after finding him, he 
might be unable to effect an exchange, owing to the inequality 
in value of the things to be exchanged. In the second place, 
(2) we find that money serves directly and immediately as a 
denominator or namer of values. In other words, money is 
the " common language of valu£." The phrase " measure 
of values " is used by many economists to characterize this 
function, because they hold that the money commodity must 
have value in itself, and that the value of other commodities 
is found by comparing their value with the value of the 
money commodity. 

This second function springs naturally from the first, for 
as men make exchanges commonly for some commodity, 
they naturally form the habit of naming the values of all ex- 
changeable things with that commodity as one term of the 
value ratio. That this function may be best fulfilled there is 
usually provided a definite, concrete money unit like our 
gold dollar, which consists of 25.8 grains of gold nine-tenths 
fine. One-tenth of the weight of gold coins consists of 
an alloy of baser metals which is formed principally of 
copper. The weight of pure gold is therefore 23.22 grains. 
When, having such a unit, we say that a commodity is worth 
$10, we mean that the exchange value of the commodity is ten 
times that of the monetary unit. It sometimes happens that 
men name values, not in terms of the money actually used, 
but in terms of some money which has been in earlier days the 
regular medium of exchange. Thus, throughout our Eastern 
States one often hears values reckoned in shillings, though it 
is long since there was any money of that denomination 
coined. Such money is called " money of account." 

In the third place, (3) money serves the function of a 
standard of deferred payments. If I wish to sell commodities 



MONEY 227 

or services to-day to one who can pay me only at some future 
time, it is of the utmost importance that we should have some 
agreed standard according to which the payment should be 
made. This function of money is usually facilitated by hav- 
ing a legal tender quality attached to it, though such a legal 
tender quality is by no means necessary to the fulfilling of the 
function. By the use of the term " legal tender " we mean simply 
that the legislature has declared that anyone having a debt to 
pay may discharge his debt through the " tender " or offer of the 
prescribed commodity, and that in case of a suit at law the 
courts will declare such a tender to have been a legal one. It is 
clear that the third function is only an extension of the 
second. Some authors attribute to money a fourth function, 
that of serving as a store or receptacle of value, so that the value 
may be transferred from place to place and from time to 
time. Thus Roman gold money, preserved for two thousand 
years, has brought its value down to our own time ; and gold 
money taken across the Atlantic bears with it its stored- 
up value. 

And now we may sum up what has gone before in a formal 
definition of money in the stricter sense of the word. Money 
is any commodity that serves as a medium of exchange, as a 
denominator or namer of values, and as a standard of deferred 
payments. And the economists who regard the fourth func- 
tion of money as essential would complete the definition by 
adding the words " and as a store of value." The meaning 
given to the word money in the following pages, whether pop- 
ular or scientific, will in each case be evident from the context. 

Qualities Desirable in the Material of our Money. — 
Many things have been used as money at one time or another 
in the world's history : cattle nearly every^^here ; furs, es- 
pecially in the Northern countries ; oil ; wampum, among 
the early New Englanders and New Yorkers ; tea, at Rus- 



228 ELEMENTARY PRINCIPLES OF ECONOMICS 

sian fairs ; tobacco, in the early days of Maryland and Vir- 
ginia; many baser metals; and the two precious metals, 
gold and silver. Of all the metals, gold and silver have in 
civilized nations been found best adapted to money uses. Of 
the two, gold has shown a special fitness, and now bids fair 
to survive as the money metal of the future. Nevertheless, 
silver is still everywhere used in large quantities, though 
among advanced nations it generally occupies a subordinate 
position. The qualities which have given gold and silver 
their predominance for use as money are precisely those 
qualities which we may readily recognize as the qualities 
that all money should have. In the first place, they are very 
generally desired, independently of their money use, since they 
can be used in the arts as well as for ornament. This fact 
gives them security and stability of value. Wlienever their 
value begins to fall, their use for other purposes than that of 
money increases and so prevents the fall in value from being 
as great as it otherwise would be. Moreover, this stability 
of value is further secured by the fact that the annual produc- 
tion of these metals bears so small a proportion to the entire 
amount in existence. Gold and silver are almost imperish- 
able. The Director of the United States mint estimates 
that 31,626 tons of gold and 480,843 tons of silver had been 
produced in the world down to the end of 1914. He estimates 
that about 918 tons of gold and about 8796 tons of silver 
were produced in 1914. Bearing in mind the durability of 
both metals and the guarantee of careful preservation assured 
to both by their high specific value, it will be seen that even 
the present unprecedentedly large annual production repre- 
sents but a small part of the world's total surviving stock. 
And yet, as will be explained later, the great increase of 
production during recent years has exercised a marked influ- 
ence on all the problems connected with money. 



MONEY 229 

The high specific value of the precious metals — that is, 
their high value in proportion to their weight and bulk — 
adapts them for use as money by making them a convenient 
store or receptacle of value. Because of their high specific 
value, the cost of transporting them from place to place is 
slight, and therefore their value varies little from place to 
place. In other words, they have a high degree of portability. 
Their durability and indestructibility are also important 
qualities, while their extreme divisibility without loss of value 
makes it possible to secure a medium of exchange of any de- 
sired value, however small. Their malleability renders coin- 
age easy, as does also their homogeneity, by virtue of which 
one ounce or pound is always just as valuable as any other 
ounce or pound. Moreover, the metals and the coins made 
from them are readily recognizable on account of their pecul- 
iar ring and their other attributes, and are therefore well 
adapted to popular use. 

Let us now sum up these qualities which are found espe- 
cially desirable in the money material : they are (1) com- 
modity value, (2) high specific value, (3) stability of value, 
(4) uniformity of value, (5) cognizability, (6) durability, 
(7) portability, (8) malleability, (9) homogeneity. 

Coinage. — When the metals first came to be used as a 
medium of exchange, they passed from hand to hand in their 
rough state, as " dust " or in nuggets, and the testing of the 
amount and fineness was left to the parties to the exchange. 
In course of time, private individuals of note occasionally 
stamped or otherwise certified to the w^eight or fineness or 
both, a custom which still obtains in some parts of the world. 
Gradually, governments took over the work of providing an 
authorized currency, and systems of regular coinage were de- 
veloped. In attempting to improve coins, governments have 
sought first of all to prevent counterfeiting by making the 



230 ELEMENTARY PRINCIPLES OF ECONOMICS 

coins of regular and uniform sizes, and by various devices, 
such as elaborate designs upon the face, milled edges, etc. 
In all this, governments, though they do not give the origi- 
nal value to the money, do increase the value, by the superior 
exchangeability which their certification confers upon it. 

When the government at its mint coins for private persons 
any metal they may bring to it, the coinage is said to be on 
private account or free coinage. The expression " free coinage," 
therefore, does not have reference to the cost of coining. If the 
government coins for private persons luithout charge, coinage is 
not only free but also gratuitous. Any charge by the mint for 
coinage is called mintage. When the charge is just sufficient 
to reimburse the government for the expense of the work, it 
is called by the French name brassage; anything in excess of 
such a charge is then called seigniorage. When the govern- 
ment buys the metal in the market at the market price and 
coins it, the coinage is said to be on government account. If 
the face value of the money thus coined exceeds the market 
value of the metal by more than the expense of coinage, the 
difference constitutes another form of seigniorage. All the 
great industrial nations to-day coin gold on private account 
and silver on public or government account ; in other words, 
they have free coinage of gold, but not of silver. In England 
and the United States the coinage of gold is also gratuitous : 
though in England if one wants the coin immediately, one 
must pay the Bank of England \^d. per ounce. 

Governments and Money. — From the fact that govern- 
ments regulate the coinage of money, coupled with the fact 
that they often make it a legal tender, there has grown up in 
the minds of many people the erroneous idea that govern- 
ments make money. As we have seen, all the functions that 
make money what it is can be fulfilled and have been fulfilled 
without the participation of government at all. Govern- 



MONEY 231 

ments, therefore, do not make money. But by careful coin- 
age to prevent counterfeiting, by stringent laws against coun- 
terfeiting, and by conferring a legal tender power upon the 
medium of exchange, governments have done much and can 
do much to increase the currency or exchangeability of money, 
and hence may give to a certain weight of money material 
an increased value. Gold and silver would have a consider- 
able value to-day for use in the arts and for ornament, even 
if they were not used as money at all. They would have a 
very high value as commodities and as money, even if the 
government should leave the work of coinage and the work 
of debt enforcement to private honor. But it cannot be 
doubted that gold and silver to-day have a higher value than 
they would have in either of the two cases just assumed. 

Prices and the Value of Money. — It is clear from what 
has been said concerning money as a namer of value, that a 
change in the value of the money unit means a change in the 
general prices of other commodities. To say that prices have 
risen is the same as saying that a dollar has become cheaper ; 
i.e. it takes more dollars to buy the same commodity. 
Again, any cause that lowers prices thereby raises the value 
of money. Prices and the value of money vary inversely. 

Prices and the Quantity of Money. — But is there any 
relation between the quantity of money and prices ; in other 
words, between the quantity of money and the value of the 
money unit ? When prices are high, it is evident that a larger 
volume of the medium of exchange is needed, the rapidity 
of circulation remaining the same, than when prices are low. 
If coats are $20 apiece, it takes a greater quantity of the 
medium of exchange to buy them than when they are only 
$10 apiece. This is a fact about which there is no dispute. 
But it is a distinct and difficult question whether an increased 
quantity of the medium of exchange can itself make prices 



232 ELEMENTARY PRINCIPLES OF ECONOMICS 

high, or whether it is the liigh prices that call forth the in- 
creased quantity of medium. 

The Quantity Theory. — To compare and discuss the dif- 
ferent theories of the causes that determine the value of 
money is beyond the scope of an elementary treatise, and 
we can confine ourselves, therefore, to the quantity theory, 
which in one form or another is the theory most widely 
accepted in the United States. It is not easy to state the 
quantity theory briefly, and at the same time accurately, but 
in a general way it runs as follows : Other things being equal, 
the value of money varies inversely, and general prices vary 
directly with the quantity of money. Stated in another way, 
with a view to include some of the " other things " that in 
the above statement are assumed to be " equal," we might 
phrase the theory as follows : Other things being equal, 
the value of money and the ge7ieral price level will be determined 
by the balance of demand and supply of money. By demand 
for money is meant the total amount of money work to be 
done, i.e. the number of exchanges to be effected. With 
trade brisk, a great volume of commodities is produced 
and exchanged, and there is a strong demand for money. 
Hence unless the money is increased in amount, or the rapid- 
ity of its circulation is increased, or unless something else 
takes part of its work of exchanging, each piece of money 
will have to do more exchanging, and it can do this only by 
exchanging each time for more goods, i.e. at lower prices. 
By supply of money is meant its quantity taken in connec- 
tion with- the rapidity of its circulation. Now, according 
to the theory, if the general state of business is thought of 
as unchanging, while the supply of money increases in either 
of its factors, as just given, there will be less money work 
for any piece of money to do, other things being equal; any 
piece of money will have a lower ratio of exchange than be- 



MONEY 233 

fore, — which is the same as saying that prices will be higher. 
To go a step farther, we may say that, — other things being 
equal, — if demand for the medium of exchange increases 
faster than its supply, the general price level will fall, and 
vice versa. 

In the foregoing statements of the quantity theory, we 
have used the phrase "other things being equal." By far 
the most important among the " other things " is the use of 
credit to replace or supplement money in the work of ex- 
changing. This use is already widespread throughout the 
world and is rapidly increasing. Credit in exchange is 
used chiefly in two ways : first, in the form of credit money 
such as government and bank notes; and, second, by the 
transfer of bank deposits that results from the use of 
checks. The phrase deposit currency is coming to be used 
to describe this last element in the general medium of ex- 
change. And just as money may have more or less rapid 
circulation or " turn over," so bank deposits may be used 
more or less briskly in the work of making exchanges 
by checks. 

To expand the quantity theory further, therefore, we 
may say that changes in the general price level depend upon 
relative changes in the volume of trade, as compared with 
changes in the volume and rapidity of circulation of the 
currency with which the trade is carried on, this currency 
consisting wholly or chiefly of money and deposit currency. 

The Value of Money and the Cost of Production. — The 
theory holds also that in the long run, the value of money is 
influenced by the cost of production of the precious metals. 
Dear money and cheap goods, it is said, will make mining 
cheaper and more profitable, and hence will tend to increase 
the output of the precious metals. Conversely, cheap money 
and dear goods will lessen the incentive to mining, and hence 



234 ELEMENTARY PRINCIPLES OF ECONOMICS 

will tend to lessen the supply of monej^ metal or diminish 
its rate of increase. 

The extent of the practical influence of cost of produc- 
tion upon the quantity of money and hence upon prices 
will depend upon many factors, such as the greater or less 
degree of chance in mining. It is generally agreed that 
under present conditions the practical influence of cost is 
relatively slight. 

General Prices and Prices of Individual Commodities. — 
It is to be particularly noticed that v/e have spoken of 
changes in general prices, or of changes in the " price level." 
There is nothing in the theory that would be inconsistent 
with an increased value of money coinciding with a rise in 
the value of some other commodity or group of commodities. 
It is always happening that while general prices are rising 
or falling, the prices of some commodities are moving in the 
opposite direction. Even though the quantity of money 
were very greatly and very rapidly decreased, the difficulties 
of producing some other commodity might increase more 
than in proportion, with the result that the value of that 
commodity, measured in terms of money, would rise in- 
stead of fall. 

Paper Money. — Our discussion of money material and the 
qualities desirable in that material had reference of course 
to OLU" primary metal money. Another form of money which 
is used extensively in modern days is paper money, which 
usually consists of written promises to pay on demand, given 
by banks -or by the government. People take these promises 
to pay and use them as money, because they believe that the 
promise will be kept ; or because they think that others will 
accept them without question; or because they know that 
the notes, having been made legal tender, must be accepted 
for debt unless otherwise expressly stipulated by contract; 



MONEY 235 

or because, as is the case with most kinds of paper money, 
such bills or notes are receivable for taxes. Where confi- 
dence in paper money is complete, such money is often 
preferred to metal money, because more convenient. 

If the student will read carefully what is engraved on the 
different kinds of paper money circulating in the United 
States, he will readily learn its nature, and will discover that it 
is of two general kinds : notes of national banks and of Federal 
reserve banks, and notes and certificates of the Federal Govern- 
ment. The paper money issued by the government is of 
several different kinds. Gold certificates and silver certifi- 
cates are simply pieces of paper entitling the holder to demand 
and receive from the treasury the number of dollars printed 
on the face of the certificates, in gold and silver respectively. 
On the other hand, the so-called " greenbacks," or United 
States Notes, — about $347,000,000, — which grew out of 
the exigency of the Civil War, and the so-called Sherman 
Notes, or Treasury Notes of 1890, now very rare, are simply 
government promises to pay on demand the amounts named 
on the face of the notes. These are not backed up dollar for 
dollar by hard money in the Treasury, but are protected by 
a reserve fund which is supposed to be sufficient to meet ail 
demands as they are made. National bank notes and the 
notes of the new Federal Reserve Banking system will be ex- 
plained in the next chapter. 

Dangers of Irredeemable Govermnent Notes. — It is 
easy to set printing presses to work, and to issue money in un- 
limited amounts. This is apparently much easier than taxa- 
tion as a means of paying the expenses of government, and 
the temptation to pursue such a policy has often promoted 
waste and extravagant expenditure. In order to keep the 
new paper in circulation it is always necessary to make it 
legal tender. Confidence in the ability and willingness of 



236 ELEMENTARY PRINCIPLES OF ECONOMICS 

government ultimately to redeem the paper is likely to de- 
crease. The new paper currency therefore usually depre- 
ciates until it is worth less per unit than the old metallic cur- 
rency. Since debtors always prefer to pay their debts in the 
cheapest legal tender money available, the paper currency 
alone will be used in business transactions, and the metallic 
currency will disappear from circulation, going to other coun- 
tries in payment for imports or being melted down for use 
in the arts. This is in accord with the well-known law laid 
down by Thomas Gresham, Queen Elizabeth's finance min- 
ister, which says that when ttvo hinds of money of the same nom- 
inal value per unit are both lec/al tender, the cheaper unit always 
drives the dearer out of circidation. Since the depreciated 
money makes prices high, all kinds of fixed incomes such as 
salaries, interest due on debts, etc., will evidently have less 
purchasing power or buy less goods than has formerly been the 
case. This is a great inconvenience in international trade, 
because one nation does not recognize the legal tender quality 
of another nation's paper money, and foreigners lose faith 
in a paper money which is not kept at par with the metal 
money. Governments can keep their paper money at par 
by redeeming it in gold whenever gold is demanded. In 
such cases paper money is said to be redeemable. 

Bimetallism 

It is probably impossible to give to young people born since 
1896 an adequate idea of the bitterness of the political con- 
troversy of that year over the question of bimetallism. In 
many respects it resembled war, and it led to frequent and 
confident prediction of civil war. Especially difficult must it 
be for the young man of to-day to realize that less than a 
generation ago a national election depended upon the fact 



MONEY 237 

that for the twenty years then ending prices had been 
faUing ! 

If the student of to-day can summon sufficient interest to 
the task, we shall consider briefly " what it was all about." 

To constitute a system of bimetallism, three things are 
necessary : two metals, free coinage of both at a fixed ratio, and 
the giving of full legal tender quality to both. Down to the 
nineteenth century, silver was still the usual money of trade 
and reckoning, though gold was also used. Governments had 
generally in the latter part of the period coined freely the two 
metals at a fixed ratio of weight. A frequent ratio was ISi to 
1, which means simply that the governments had put 152- 
times as many grains of silver into the silver coins of any 
denomination as into the corresponding gold coins. At the 
beginning of our separate existence as a nation, we in the 
United States chose the ratio of 15 to 1, changed it in 1834 to 
16.002 to 1, and again in 1837 to 15.988 to 1. This ratio in 
popular speech was known as " 16 to 1." 

The Latin Monetary Union. — The European ratio was 
maintained within narrow limits with free coinage of both 
metals for about seventy years during the nineteenth century 
by the action, first of France, and then of a combination of 
countries, called the Latin Monetary Union, in which PVance, 
Belgium, Switzerland, and Italy were most prominent. 
Under their system, everyone who had gold or silver in any 
form could have it changed to money at the established ratio 
of coinage. 

Limitation of the Coinage of Silver. — About 1873, how- 
ever, Germany decided to change from silver to gold mono- 
metallism, and threw upon the markets of the world an im- 
mense amount of silver at the same time that she increased 
the demand for gold. In the same year, our own country 
dropped the silver dollar from the list of coins to be struck at 



238 ELEMENTARY PRINCIPLES OF ECONOMICS 

the mint, thus putting us on the basis of gold monometal- 
lism, although, as a matter of fact, no silver dollars had been 
coined for years. The value of silver rapidly declined and 
the Latin Union soon after suspended its free coinage. To 
add to the confusion, large discoveries of silver at about 
the same time brought about a great and rapid increase of 
the supply. The result of these changes was a violent de- 
parture from the old market ratio between the two metals, 
silver falling so much in value in terms of gold that within 
recent years according to the state of the market it has re- 
quired from about twenty-six to thirty-nine ounces of silver 
to purchase one of gold. 

Results of Monetary Changes. — These changes naturally 
resulted in lov/er prices, and thus virtually increased all 
debts, and produced great distress. But the increase in 
the debts was only a part of the mischief. South America 
and the Oriental countries being on a silver basis, trade had 
easily been carried on with them as long as gold and silver 
readily exchanged approximately at an established ratio; 
but when the ratio began to fluctuate widely, an uncertain 
and disturbing element was introduced into such trade, 
rendering it highly speculative, and therefore on the whole 
less profitable to the world. The merchant in Liverpool 
who sold goods to a merchant in India would agree to receive 
in exchange a fixed sum of silver money ; but, as it was neces- 
sary for the English merchant to exchange this silver for gold, 
a fall in the value of silver during the progress of the trans- 
action might bankrupt him. LTnder these conditions expor- 
tation of manufactured goods to the Orient was impeded. 

These, in brief, are some of the difiiculties that are be- 
lieved by many to have resulted in great measure from the 
general limitation of the coinage of silver. Bimetallism was 
proposed as a remedy. Under bimetallism government 



MONEY 239 

would coin at a fixed ratio all gold and silver that anybody 
desired to have coined ; in other words, government would 
coin both gold and silver on private account. Bimetallic 
coinage by one country alone is called national bimetallism. 
It is the general view of economists that no country is com- 
mercially powerful enough to furnish such a demand for both 
metals as would be necessary to maintain parity of value at 
any coinage ratio yet proposed. 

With international bimetallism, however, which means 
bimetallism based on an agreement like that of the Latin 
Monetary Union before 1874, the case is different. Econo- 
mists were at one time inclined to favor such a monetary 
policy, and even to-day there are in Europe and America 
some economists who believe that such international action 
would be feasible. They beheve that if, for instance, Eng- 
land, the United States, Germany, and France should enter 
into such an agreement, those countries could maintain the 
ratio. International bimetaliists remind us that gold and 
silver are used principally for money, and that owners of gold 
and silver would be obliged by the international agreement 
either to have the metal coined at the government ratio, or 
to sell it in the market for use in the arts. But the arts ab- 
sorb only a relatively small portion of the annual product, 
and a very much smaller portion of the total existing supply. 
It is therefore maintained that governments are in the posi- 
tion of monopolists, and by agreement could maintain a 
fixed coinage ratio. 

Recent Monetaey History 

International Monetary Conferences. — The strong desire 
for international bimetallism, felt both by economic theorists 
of repute and by practical statesmen in many lands, led to 



240 ELEMENTARY PRINCIPLES OF ECONOMICS 

repeated monetary conferences. The most noteworthy of 
these were the Paris Conference of 1878 and the Brussels 
Conference of 1892. But these conferences did not result 
in the restoration of bimetallism. England, as a great credi- 
tor nation, led the opposition to all plans for international 
action. 

Silver Purchase Acts of 1878 and 1890. — No great state 
coins both metals freely. In the United States the Bland- 
Allison Act of 1878, providing for the purchase and coinage 
of a limited amount of silver, was followed in 1890 by the 
Sherman Law, a compromise measure, which provided for 
an increase in the silver purchases. 

Repeal of the Sherman Act. — For two or three years there 
were heavy exportations of gold from the United States, and 
as a result it was commonly claimed that if the Sherman Act 
were not soon repealed, gold exportations would continue 
until the United States would be driven to a silver basis. 
During this same critical period, the Indian mint was closed 
to free coinage of silver, and the price of the metal fell within 
three days from 82 cents to 67 cents an ounce. Added to 
this was the fact that the revenues of the United States fell 
off until they were less than current expenditures, thus creat- 
ing a fiscal deficit. This combination of circumstances led 
to a special session of Congress in the late summer of 1893, 
which, after a bitter fight, repealed the purchasing clause of 
the Sherman Act. 

The Currency Act of 1900. — Between 1893 and 1900 the 
monetary situation gradually improved, although for two or 
three years the United States, in order to protect the cur- 
rency, was driven to repeated issues of bonds under very 
humiliating circumstances. The defeat of Mr. Bryan, the 
Democratic candidate for President in 1896, who ran on a 
platform declaring for " the free and unlimited coinage of 



MONEY 241 

silver and gold at the ratio of 16 to 1, by the independent ac- 
tion of the United States," puved the way for a new currency 
act which was passed by Congress March 14, 1900. This 
act expressly declares that the gold dollar shall be the 
standard of value in the United States, and that all other 
kinds of money are to be maintained at a parity with gold. 
It further requires the United States Treasurer to maintain 
a special reserve fund for the redemption of United States 
notes. This fund must in all cases amount to .1 150,000,000 
in gold or in gold and redeemed notes. If the amount of gold 
falls below .$100,000,000 and the redeemed notes, which con- 
stitute the remainder of the fund, cannot at the time be ex- 
changed for " free " gold in the general treasury, short time 
gold bonds may be issued and sold to make up the deficiency 
in the reserve. As to silver coinage, the act provided for 
the coinage of silver dollars from the already existing 
stock of silver, until the number of such dollars should 
equal the amount represented by the " Treasury notes of 
1890," issued to pay for the silver. These silver dollars, 
or the corresponding silver certificates, were paid out in 
redemption of the " Sherman notes," as fast as such notes 
were presented at the Treasury. When practically all the 
Sherman notes had been redeemed, the remainder of the 
silver bullion purchased by the government — representing 
the seigniorage from the silver coinage — was coined into 
subsidiary silver. 

It will be seen, therefore, that by the terms of this law, 
strong provision has been made for securing parity of all 
parts of our money, and for strengthening the position 
of the United States as a country of gold monometallism. 
Our monetary position has been further strengthened by the 
Federal Reserve Act, which will be explained in the following 
chapter. 



242 ELEMENTARY PRINCIPLES OF ECONOMICS 



SUMMARY 

1. Money serves as a medium of exchange, as a namer of values, 

and as a standard of deferred payments. 

2. The precious metals have certain desirable qualities that have 

given them first place for money use. 

3. Governments do not create, but they do increase the value of 

money. 

4. The quantity theorists hold that the value of money depends 

on the quantity ; that, other things being equal, increasing 
the quantity of money decreases its value ; and decreasing 
the quantity increases its value. 

5. Bimetallism was long advocated as a policy to secure stability, 

but recent economic tendencies have destroyed practical 
interest in the subject. 



QUESTIONS FOR RECITATION 

1. Name the qualities desirable in money. Mention different 

things that have been used as money. 

2. What is coinage? Free coinage? Gratuitous coinage? Bras- 

sage ? Seigniorage ? 

3. What is the relation of government to money ? 

4. State the quantity theory of the value of money. 

5. From an examination of actual paper money, name and describe 

the different kinds that are used in the United States. 

6. What are the evils of irredeemable paper money ? 

7. What is bimetallism? International bimetallism? What was 

the Latin Monetary Union? 



QUESTIONS FOR STUDY AND DISCUSSION 

1. How much gold has been produced since 1900? What per- 

centage does it represent of all the gold ever produced? 

2. Is there any one in your town who can recall the first cheek 

ever used in the town? 

3. Did greenbacks drive gold out of circulation in California 

during the Civil War? Why? 

4. In what qualities is gold preferable to silver as a money metal? 

5. What is the. present market price of silver bullion? What is 

the relation between the buUion value and the money value 
of American silver? 

6. What are subsidiary coins? token coins? 



MONEY 243 



LITERATURE - j 

Brown, H. G. : International Trade and Exchange. ; 

Fisher, Irving : The Purchasing Power of Money. \ 

Holdsworth, J. I. : Money and Banking. [ 

Jevons, W. S. : Money and the Mechanism of Exchange, Ch. VIII i 

(the four pages on Gresham's Law). \ 

Johnson, J. F. : Money and Currency. '\ 

Kinley, David : Money, A Study of the Theory of the Medium of 

Exchange, especially Chapter V. i 

Laughlin, J. L. : The Principles of Money. > 

Scott, W. A. : Money and Banking, pp. 69-72. 'i 
Walker, F. A. : Money, Part I, Ch. I, pp. 1-10 ; also Money, Trade \ 

and Industry, and International Bimetallism. \ 

White, Horace : Money and Banking, Part I, Ch. II, pp. 23-29. \ 



CHAPTER V 
CREDIT AND BANKING 

What Credit Is. — We have seen the immense develop- 
ment in exchange that has been made possible by the use 
of money, — a development resulting in the division and 
organization of labor and a revolution of the whole economic 
life. Yet money alone as a medium of exchange is entirely 
inadequate to explain the magnitude of present commercial 
transactions. Great as is its advantage over barter, money 
is too clumsy an instrument for many modern purposes. 
While it is by no means dispensed with in our own day, 
money is primarily characteristic of the economic stage 
preceding our own. The characteristic instrument of ex- 
change in our day is not money, but credit. 

Like so many other terms borrowed by economics from 
the language of everyday life, the word " credit " has many 
meanings and shades of meaning. One of the commonest 
of these is indicated when we say that a man's credit is good 
or that he has good credit, by which we mean that he has 
the reputation of paying his debts and has the ability to 
do so, and that therefore other men are willing to sell him 
goods and to wait for their pay until a future date. Another 
important meaning of the word refers to the character, 
not of the man, but of the transaction itself. The transfer 
of goods with the expectation of future payment is a credit 
transaction. This is the idea which we embody in the 

244 



CREDIT AND BANKING 245 

word " credit " in the science of economics. We may 
therefore define the term as follows : A credit transaction 
is a transfer of goods for a promise of a future equivalent. 
First, it should be noticed that the transaction is partly 
present and partly future, or, in other words, (1) credit 
contains an element of time. In the second place, it is to 
be remarked that (2) the transaction involves confidence 
either (a) in the character and resources of the borrower or 
(6) in the sufficiency and security of goods which he may 
have pledged for the fulfillment of his promise. A third 
factor frequently present is (3) a written evidence of in- 
debtedness, given by the borrower to the lender. This 
writing constitutes the instrument of credit. 

The Mechanism of Credit. — The mechanism of credit, 
or the machinery by which credit operations are carried 
on, consists of two parts : (I) the instruments of credit, — 
the evidences of indebtedness, — such as checks, drafts, 
notes, bonds, etc. ; and (II) the institutions of credit, con- 
sisting principally of banks and clearing-houses. 
i I. Instruments of Credit. — Among the instruments of 
credit the simplest and most extensively used is the (1) check. 
A check is an order upon a bank by an individual or company 
requiring the payment of a certain sum of money to the order 
of a person named or to the holder of the check. In this form 
of credit the element of time plays a very small part. If 
money were paid instead of a check, the person receiving 
it would be likely to deposit it in a bank. Receiving a 
check, he carries it to the bank. The element of credit 
here prominent is the trust or confidence involved, the 
confidence that the check will be honored by the bank 
upon which it is drawn. 

Bankers also use checks. When one banker gives a check 
on another, the instrument is usually called a (2) draft, and 



246 ELEMENTARY PRINCIPLES OF ECONOMICS 

we shall so use the word in what follows. Another form 
of draft arises when a comyany or an individual orders the 
'payment of a sum of money to a hank. This form we shall 
call a (3) hill of exchange. When the drawer and drawee 
of a draft or bill of exchange live in the same country, the 
instruments are called domestic or inland; otherwise they 
are called foreign. Both these terms — drafts and bills of 
exchange — are so loosely and variously used that the reader 
must usually judge a writer's meaning from the context. 

A fourth form of instruments of credit consists of (4) notes, 
which are usually promises to pay a certain sum of money 
for value received, under conditions named, on demand or at 
the expiration of a certain period. Here the time element 
is important, as is indicated by the fact that interest is 
generally paid on such instruments. Such notes are of 
three general kinds, according to the character of the maker. 
(a) Individuals and companies issue promissory notes for 
payment on demand or within a certain time, (b) Banks in 
most countries issue notes which commonly pass as money 
and which have a different legal standing from that of the 
notes of individuals. Such are the national bank notes and 
federal reserve notes of the United States, (c) Governments 
themselves often issue notes such as those we have already 
discussed in treating of the subject of paper money. Bank 
notes and government notes very rarely bear interest. 

The facsimiles on pages 247 and 248 will help the student 
to understand the nature of the instruments which have just 
been described. 

Ordinary instruments of credit do not circulate freely 
like money, but are intended to be used primarily in one 
transaction; yet they are by no means confined to this. 
Thus checks, drafts, and bills of exchange often pass through 
many hands, and notes are often transferred once, twice, or 



CREDIT AND BANKING 247 

many times. With bank notes and government notes, how- 
ever, which circulate as money, the case is quite different. 
These are (a) intended for general use; (b) they are always 
drawn to bearer; (c) they are issued in fixed and convenient 



/'KA': 



y C t- ' 'Sy ■■ /' 



Facsimile of Bank Check 



denominations; and (d) the credit of the issuing agent is 
usually taken as a matter of course. 

Credit transactions between individuals usually take one of 
the two following forms : (a) usually a person buying goods 




Facsimile of a Draft 



on credit pays the person from whom the goods are bought 
by money, check, or draft ; but, instead, (6) the seller may 
" draw on " the buyer by means of a bill of exchange. Let 



248 ELEMENTARY PRINCIPLES OF ECONOMICS 

US suppose that A is the seller and B a buyer in a distant 
place. A writes an order upon B to pay a bank, C, for A's 



H c 






\ * *^^ ,', * Jfi^l^t Pay «o tbc Order ot 

r^3*it«— -•- r - _ 



D@&.&.3IRd 




VoJjiK reoelTed anil cgiarge io asoeant o« J • *nsiBa<:e»^ 

h 



..Ck 



^•t«Vi^' 



Facsimile of a Bill of Exchange 

account, the amount of the debt within a stated time, say 
thirty days. If B on presentation of the order by the bank 
C acknowledges the debt and agrees to pay it, he writes 




ifi?. 

after date.'for Value Received, 
I promise to pay The Commercial Natd^nal Bank of iiladison, or Order, 



at THE COMMERCIAL NATIONAL BAHK, o:f Madison, Wisconsin, 



with int^^ist ^ter-JvA! 



ITLDollars, 



at the rate of •AMfe*— per «enfe p^ gnnum until paid. 

_._ yhjiM^....m........ zizz 




Facsimile .of a Note 



" accept " on the bill and signs his name. The instrument 
thus becomes legally binding upon the acceptor and is now 
called an acceptance. 



CREDIT AND BANKING 249 

Checks and promissory notes may be transferred by indorse- 
ment. The payee, by writing his name on the back of the 
instrument, orders the payment of the money to another per- 
son whom he may name in writing. By thus indorsing the 
instrument, he becomes responsible for its payment. The 
person to whom such an instrument is indorsed, or the 
indorsee, may also in turn become an indorser, in which 
case he also assumes similar responsibility. 

Book credit (5) is another form which is extensively used, 
especially in retail trade. When goods are sold, a record 
is kept, or, as we ordinarily say, the goods are " charged," 
a bill for the amount being sent at a later time. Where 
two persons mutually grant book credit, as is often the case 
among merchants in small places, only balances need be 
paid in money on settling day. 

II. Institutions of Credit: Banks and Clearing Houses. — • 
Bankers have already been mentioned as middlemen in 
credit transactions. They are sometimes called dealers in 
credits, and indeed there is little that they do which is not 
in one way or another connected with credit. But banks 
are not mere agents. They have at starting the money 
which represents the capital, and as time goes on they 
receive money from various sources in the regular way of 
business. With these funds they are prepared to discount 
and buy the notes of their customers ; but to a very great 
extent they buy such notes not with cash, but by writing 
the name of the note seller on a page of the bank books 
and crediting him thereon with the proceeds or avails of the 
note, i.e. the amount paid for the note. The note seller thus 
becomes a depositor of the bank. Note that in modern 
banking, therefore, a deposit is only exceptionally the result 
of an actual depositing of money, though in early times, 
as the word indicates, actual physical deposits were the 



250 ELEMENTARY PRINCIPLES OF ECONOMICS 

rule. To-day a deposit is usually the result merely of an 
exchange of the credit of the individual, in the form of a 
promissory note, for the credit of the bank, represented by 
an entry in the bank's books. Banks are debtors of their 
depositors, and creditors of those to whom they lend money. 
Their source of profit is not exclusively nor even chiefly their 
own capital, but rather the exchange of credits described 
above. As a rule, commercial banks either pay no interest 
on deposits or they pay interest at a rate considerably lower 
than that charged their customers, i.e. their rate of dis- 
count, the difference constituting their chief source of profit. 

In earlier times nearly all banks in the United States 
issued notes that circulated as money. Indeed, such note 
issues were commonly regarded as the principal business of 
banks. Now only national banks and Federal Reserve Banks 
are able profitably to issue their own notes. In nearly all civ- 
ilized countries, the power of banks to issue circulating notes 
has been greatly restricted, and the number of banks that find 
a source of profit in such issue is constantly diminishing. 

It would take us too far afield were we to enter upon a 
complete discussion of the various kinds of banks and their 
precise difterences. Briefly, we may say that any institu- 
tion that (a) discounts notes or other forms of commercial 
paper, and (6) receives and holds deposits, is a commercial 
bank, whether or not it issues notes, and whether or not it 
is incorporated by law. The two essential functions of 
banking, then, are discount and deposit; the third common 
function, -issue, is not essential or universal. When the 
word " bank " is used alone it always refers to an institu- 
tion exercising these two essential functions. Savings hanks 
are therefore not commercial banks. The four classes of 
commercial banks in the United States are our national 
banks, numbering in 1915 about 7500; state banks, num- 



CREDIT AND BANKING 



251 



bering about 14,000; private or unincorporated banks, 
numbering about 1100; and loan and trust companies, num- 
bering about 1500. Loan and trust companies are incor- 
porated institutions which perform many of the functions 
of commercial banks as well as some others, resemblances 
varying more or less from state to state. 

The nature of banking operations will be made clearer 
by an examination of the following statement of the con- 
dition of a national bank. 



Report op the Condition op The National Bank op 
N. H. At close of business, June 23, 1916 



Resou7xes 


Liabilities 


Loans and Dis- 




Capital Stock $ 50,000.00 


counts 


$192,706.92 


Surplus 50,000.00 


Overdrafts 


29.48 


Undivided Profits 18,417.89 


U. S. Bonds 


30,000.00 


Nat. Bk. Notes out- 


Federal Res. Bk. 




standing 15,000.00 


Stock 


6,000.00 


Deposits 243,460.17 


Other Bonds and 






Securities 


61,492.26 




Redemption Fund 


750.00 




Dep. with Ap- 






proved Res. 






Agents 


37,960.97 




Dep. with Fed. 






Res. Bank 


5,000.00 




Dep. with other 






Banks 


17,695.16 




Nat. Bk. Notes of 






other Banks 


6,435.00 




Gold and Silver 






Coin 


9,567.00 




Legal Tender Notes 


2,750.00 




Gold and Silver 






Certificates 


5,651.00 




Checks and other 






Cash Items 


840.27 
$376,878.06 






$376,878.06 



252 ELEMENTARY PRINCIPLES OF ECONOMICS 

Notice that on the liability side the first three items are 
liabilities in a different sense from the last two; for the 
capital stock, surplus, and profits the bank is liable to its 
stockholders; for circulating notes and deposits, it is 
liable to outside persons. Also, notice the relation between 
the total amount of cash on hand and the deposits, and 
compare the total investment of the stockholders with the 
amount of loans and discounts. Finally, notice the corre- 
spondence between deposits and loans and discounts. 

The Banking System of the United States. — Private 
and state banks and loan and trust companies operate 
under the laws of their respective states. These laws in 
recent years have been generally improved in the light of 
the world's bankmg experience. Indeed, the legal provisions 
of some states are perhaps as carefully framed as are those 
of the federal government. But regarding the matter 
broadly, one may still say that the federal banking system 
is superior to the general system of the banks of the com- 
monwealths. State laws are too numerous and various to 
permit of their detailed description here, but the federal 
system must be explained, if only in its broad outlines. 

At the outbreak of the Civil War, the federal government 
found itself confronted by the serious financial problem of 
securing adequate revenue for the prosecution of the war. 
Unusual revenues would be required, at the same time 
that the revenues from import duties, which had long con- 
stituted the main reliance of the government, were bound 
to be hard hit by the war itself. In this emergency, new 
customs duties and internal revenue taxes were imposed, 
" greenbacks " were emitted in large amounts, and bonds 
were issued. The outbreak of a war that threatened the 
very existence of the government created an extremely 
unfavorable situation for marketing the bonds. Partly to 



CREDIT AND BANKING 253 

create a more favorable bond market, partly to secure for 
the people a uniform system of bank notes, to replace the 
state bank notes of that time, the federal government 
passed the National Bank Act, creating a system of national 
banks, in 1863. 

Under the act charters for twenty years, made renewable 
for like periods, were granted to corporations of not fewer 
than five individuals, the requirement of capital and surplus 
varying with the population of the town or city in which 
the bank was to operate. These banks were required to 
invest a part of their funds in the purchase of the bonds 
of the government, against which they are permitted to 
issue their notes. The notes, thus secured by bonds, were 
further protected by a redemption fund at Washington, 
created and maintained through the payment by each bank 
of 5 per cent of its average outstanding circulation. A ten 
per cent annual tax was laid upon all other bank notes, a 
tax so heavy that it promptly put an end to such notes, 
as was intended. National banks are divided into three 
classes, " country " banks, reserve city banks, and central 
reserve city banks. Each bank is required to maintain a 
" lawful money " reserve representing a fixed percentage 
of its deposit liabilities. 

On the whole the national banking system of the United 
States has been successful in securing the results for which 
it was designed. It certainly aided greatly in taking and 
holding a large part of the bonded debt. It has given us a 
secure system of note issue. On the whole it has handled, 
efficiently and safely, the banking business of the country. 
But the system before its recent modification had two clear 
weaknesses. First, the note issue, while secure, loas in- 
elastic, — or rather perversely elastic, contracting when it 
should have expanded, and expanding when it should have 



254 ELEMENTARY PRINCIPLES OF ECONOMICS 

contracted. Perhaps even more important is the fact that 
the scattering of the country's bank reserves among so many 
banks, coupled with the rigidity of the reserve requirements, 
prevented such common action in times of financial or mone- 
tary crises as might have prevented panics or at the least 
have minimized the resultant industrial depression. 

To remedy these defects in the system the Federal Reserve 
Act was passed in December, 1913, supplementing and 
modifying the provisions of the National Bank Act. All 
national banks are required to come into the Federal Re- 
serve system, and state banks are permitted to do so, by 
complying with certain provisions. 

At the head of the system stands the Federal Reserve 
Board of seven members consisting of the Secretary of the 
Treasury, the Comptroller of the Currency, and five others 
appointed by the President. An Advisory Council of 
twelve bankers holds occasional meetings at Washington 
to advise and confer with the Reserve Board. 

As the name of the Act indicates, its main purpose is to 
secure a better handling of bank reserves. For this purpose 
the country is divided into twelve sections or regions, in 
each of which is established a Federal Reserve Bank. The 
capital of these banks has been provided by the member 
banks in the several districts, each such bank contributing 
an amount equal to 6 per cent of its own combined capital 
and surplus. The management of each reserve bank is in 
the hands of a board of nine directors, chosen in three classes 
of three each, one director being in each case the Federal 
Reserve Agent of his district. 

Under the present system " country " member banks are 
required to keep a lawful money reserve of 12 per cent of 
their demand deposits, of which -fy must be deposited with 
the Federal Reserve Bank; ^ must be kept in its own 



CREDIT AND BANKING 255 

vaults ; while the remaining j^ may be distributed in any 
proportion between its own vaults and the Federal Reserve 
Bank. For reserve city member banks, the lawful money 
reserve rises to 15 per cent, and the corresponding fractions 
are -^, 1^, and ^. For central reserve city member banks 
the reserve percentage is 18, and the fractions -^s, -Mj and ^. 
All member banks must also keep reserves equal to 5 per 
cent of time deposits. 

The Federal Reserve Banks — which will be chiefly 
" bankers' banks " — have as their main business the re- 
discounting for member banks of " commercial paper " 
that has been discounted and bought by them. In this 
way, as well as through the depositing with them of a large 
part of the reserves of the member banks, the Federal 
Reserve Banks will be able to " mobilize " the banking 
strength of each district, and, in an emergency, the bank- 
ing resources of the entire country. 

Fornier provisions for national bank notes continue in 
force, except that national banks are now able to sell their 
bonds and retire their note circulation more rapidly than 
they could before. It is intended by the Act that the 
national bank notes will ultimately be retired. On the 
other hand, the Federal Reserve Banks are permitted to 
issue bond-secured notes, which we may call Federal Re- 
serve Bank notes, — and a more elastic type of notes based 
on the security of rediscounted commercial paper held by 
them, which we may call simply Federal Reserve notes. 

Briefly stated, the purposes aimed at in the Federal 
Reserve Banking system are : (1) centralization and mobiliza- 
tion of the country's banking power; (2) a greater degree of 
centralization of administration and control; (3) the estab- 
lishment of an open discount market, for the easy and regular 
rediscount of commercial paper; (4) the greater elasticity 



256 ELEMENTARY PRINCIPLES OF ECONOMICS 

of our bank note circulation, by basing it largely on bank 
assets rather than on bonds; (5) lessening of differences in 
bank discount rates in the various parts of the country; (6) af- 
fording organised aid to our foreign commerce. 

The Federal Farm Loan Act. — The Federal Reserve Act 
was designed to perfect our short time bank credit machinery 
for all classes of borrowers. The Federal Farm Loan Act, 
which became law July 17, 1916, was designed to provide 
means whereby farmers, long at a disadvantage in securing 
loans for the purchase of land, equipment, etc., may tap the 
sources of funds available for what may be called fixed in- 
vestment. Its purpose is to mobilize and vitalize credit 
through a qualitative standardization of farm mortgages, 
and the issue of bonds thereon. 

These bonds are issued and sold principally by twelve 
regional Federal Land Banks, stock in which may be held 
by the general and business public, the federal and state 
governments, and by local groups of farmers, known as 
National Farm Loan Associations. Each local association, 
composed of not fewer than ten borrowing farmers, acting 
through its loan committee in cooperation with a federal 
appraiser, makes an official valuation of landed property 
offered by any member as security for a loan. Mortgages 
given by borrowing farmers pass through the local associa- 
tions to the Land Bank, where they become security for tax- 
exempt bonds. The proceeds from the sale of these bonds 
to the general investing public filter down through the local 
associations to the borrowers. Federal supervision of the 
system is afforded by the Federal Farm Loan Board, ap- 
pointed by the President. 

The most obvious effect of the operation of the law is in the 
strong tendency to lower the interest rates on farm mortgage 
loans by facilitating the transfer of capital from city to coun- 



CREDIT AND BANKING 257 

try and from those sections of the country and the world 
where capital is relatively abundant to those where it is rela- 
tively scarce. Moreover, the system tends to equalize inter- 
est rates on farm loans throughout the country, inasmuch as 
the bonds issued by any one of the twelve banks are guaran- 
teed by all of them, both as to principal and as to interest. 

Clearing Houses, — Clearing houses were originally con- 
trived by the employees of banks with the object of saving 
time and labor. Banks in a city have continual dealings 
with one another. A regular customer of a bank deposits 
with it all the checks that he receives, no matter on what 
bank they may have been drawn. It therefore happens that 
every bank in any of our cities receives checks every day 
drawn on the other banks, while the other banks receive 
checks drawn on it. Formerly there was continual running 
back and forth among banks to balance their accounts. 
Now the representatives of all the banks in clearing house 
cities meet daily in the clearing house and exchange their 
obligations, only the differences between the sums due 
being paid. These differences are paid by the debtor banks 
to the clearing house, and by the clearing-house in turn to 
the creditor banks. 

Clearing house statistics illustrate the inadequacy of 
money alone to do the business of the modern industrial 
world. The total transactions of the clearing houses in 
the cities of the United States for the year ending Sep- 
tember 30, 1912, amounted to $168,506,362,000, or about 
forty-six times as much as all the money in the country, 
bank notes included ; for the money in the country July 1, 
1912, in the United States Treasury and in circulation, was 
only $3,648,870,651. The small proportion of actual money 
transfers necessary in paying clearing house balances illus- 
trates the same fact. Thus in the decade ending September 



258 ELEMENTARY PRINCIPLES OF ECONOMICS 

30, 1912, the New York clearing house, which includes 65 
banks in its membership, cleared transactions amounting to an 
annual average of $88,699,030,679, by making money pay- 
ments averaging annually only $3,926,103,384. Thus the 
money balances averaged only 4.42 per cent of the clearings. 

The Advantages of Credit. — It remains for us to sum up in 
separate paragraphs the advantages and dangers that attend 
the great development of credit in modern industrial society. 

1. Credit saves time and labor by furnishing a more perfect 
and convenient means of payment in large sums and between 
distant places than is furnished by the precious metals. 
Thus in international trade, relatively small sums of money 
have to be sent from one country to another, only balances 
being paid in money. 

2. Credit saves capital by taking the place of corresponding 
amounts of gold and silver. In this way society is enabled 
to employ a larger portion of the precious metals for other 
useful purposes, and to devote to other productive enter- 
prises a great amount of labor that might otherwise be em- 
ployed in still further increasing the world's stock of gold. 

3. Credit renders capital more productive. Under our credit 
system he who owns or controls capital, but is not himself 
an efficient producer, can transfer it for a compensation to 
another person who can employ it productively, and thus 
both debtor and creditor, as well as the public economy, are 
benefited. Other things being equal, capital is loaned to 
those who will pay the most for it, and under normal con- 
ditions these must be the ones who can employ it most 
productively. There are evidently two sides to this ad- 
vantage. On the one hand, as we have just said, (a) credit 
enables those who have savings, but who are loithout the dis- 
position or ability to use them productively, so to place these 
savings that they themselves receive benefit while furthering 



CREDIT AND BANKING 259 

social production. On the other hand, (6) credit enables 
those who have great business qualifications, but who have 
inadequate capital or no capital at all, to employ their energies 
and talents for their own benefit in furthering the welfare of 
society. In many cases credit brings together capital with- 
out directive power and directive power without capital, 
and thus serves to unite capital and labor. 

4. Credit furthers the accumulation of capital by gathering 
together the very smallest sums, as, for instance, in savings 
banks. Such small sums, forming in the aggregate large 
masses of capital, are lent by those who are responsible 
for them to corporations and other productive concerns. 
In this way the capital itself is concentrated while its returns 
are scattered widely among the people. Moreover, credit 
furthers the acciunulation of capital by promoting thrift, 
since it both helps and encourages men to provide for emer- 
gencies and for old age. This is particularly the case with 
institutions that supply capital to the poorer classes, and 
with American building associations, which furnish the same 
classes with capital for the construction of homes. 

Dangers of Credit. — But we must not overlook the dark 
side of our credit money. Without expanding unduly upon 
the dangers of credit we may mention some of the more 
important of them as follows : — 

1 . Credit frequently encourages extravagance, which is a fruit- 
ful source of fraud and embezzlement. Men who are granted 
credit often overrun reasonable bounds, and then in their de- 
spair resort to desperate expedients in the hope of release. 

2. Credit prompts precarious speculation. — Those who 
speculate with the savings of other people are proverbially 
careless. Our entire land is strewn with the ruins of busi- 
nesses wrecked by men who have mismanaged the wealth 
which unwise credit gave into their hands. When such 



260 ELEMENTARY PRINCIPLES OF ECONOMICS 

management assumes unusually large proportions, credit 
becomes a powerful factor inprecipitating a disastrous panic. 
Some writers have claimed that all pi-oductive credit — 
credit used in carrying on a business — is good, and that 
the evils of credit arise only in connection with credit for 
consumption, that is, credit which enables one to spend 
money for personal gratification ; but while there is a 
modicum of truth underlying this distinction, the line 
cannot be so sharply drawn. Credit for consumption does 
frequently lead to extravagance, but it also enables many 
a young man to develop personal powers and to become a 
great artist or scholar ; on the other hand, productive credit^ 
while normally resulting in great advantages to society, 
sometimes opens the way to putting business at the mercy 
of ignorance, incompetence, and dishonesty. 

SUMMARY 

1. Money having proved inadequate to the needs of modern ex- 

change, credit has displaced it for ordinary large transactions. 

2. Credit naeans the transfer of goods in the present for a promise 

of an equivalent value to be repaid at a future time. Hence 
there are two fundamental elements to be distinguished: 
time and confidence. 

3. The chief instruments of credit are checks, drafts, and biUs of 

exchange, promissory notes, bank notes, government notes, 
and "book accounts." 

4. Banks are institutions for facilitating credit transactions and 

for creating credits; clearing-houses are institutions for 
facilitating transfers of credit among banks. 

5. The American banks have now to a very large extent been 

brought within an organized Federal Reserve system. 

6. The Federal Farm Loan Act is designed to make borrowing on 

farm mortgages easier. 

7. Credit saves the time and labor involved in money payments, 

it saves capital, promotes the accumulation of capital, and 
makes a given amount of capital more productive. 

8. Credit often leads to speculation and fraud, and sometimes 

it encourages extravagance and waste in public and priveite 
consumption. 



CREDIT AND BANKING 261 

QUESTIONS FOR RECITATION 

1. What different meanings has the word "credit"? In which 

sense is it most often used in economics? 

2. In what cases is there but little time advantage in credit? 

Mention cases in which the element of confidence is very 
sUght. 

3. What is a check? A bill of exchange? A bank draft? What 

is a note? A bond? What is the advantage of a note? 

4. Describe the national banking system ; the Federal Reserve 

system. 

5. What effect does credit have upon the productiveness of capital ? 

Why? Upon the accumulation of capital? How? 

6. What are the dangers of credit? How do the evils to society 

compare with the evils to individuals? 

7. What is a bank? What functions are necessary to the idea 

of a bank? What other function or functions do some banks 
exercise? How do banks reap a profit? 

8. What is a clearing house? About what is the extent of trans- 

actions through the clearing houses of the country? How 
does this compare with the amount of money in circulation? 



QUESTIONS FOR STUDY AND DISCUSSION 

1. Write a check. Make out a promissory note ; a draft ; a bill 

of exchange. Examine a mortgage ; a bond. 

2. Visit a clearing house and describe its procedure. 

3. If you found that the loans and discounts of a bank had de- 

creased, what other item would you expect to show a decrease ? 
Why? 

4. In a bank statement is capital set down as a resource or as a 

liability? Why? 

5. "A bank is a manufactory of credit." Explain. 

6. What is the federal reserve city of your district? What are 

the limits of your district? 

LITERATURE 

See literature at close of preceding chapters. Also : — 
Bagehot, Walter : Lombard Street, Ch. II, pp. 21-27. 
Cannon, J. G. : Clearing-houses, Ch. XII. 
Conant, C. A. : History of Modern Banks of Issue. 
Dunbar, C. F. : The Theory and History of Banking, Ch. II. 
Scott, W. A. : Money and Banking, pp. 117-120. 
White, H. : Money and Banking, pp. 240-255. 



CHAPTER VI 
INTERNATIONAL TRADE 

The subject of international trade calls for somewhat ex- 
tended study before we leave the division of transfers or 
exchange. Nations do not live to themselves alone. More 
and more with the passing years trade is overleaping narrow 
local limits and is becoming world-wide in extent. Inter- 
national trade is always in the last analysis trade between 
pairs of individuals, and is in many respects precisely similar 
to trade among individuals in a single community or coun- 
try. But there are certain features in which it differs so 
materially from trade within a narrower area or within a 
single political unit that it calls for special treatment. 

In the present chapter we shall first study the nature of 
international trade, and shall conclude with a discussion of 
the restrictions, usually in the form of tariff duties, laid by 
nations upon international commerce. 

I. The Nature of International Trade 

Fundamentally Exchange of Sei"vices for Services. — 

Whenever an individual in one country sells goods to an 
individual in another country, he acquires a claim for money 
payment just as he would if the purchaser were in his own 
community. But owmg to the difficulty and risk of sending 
money back and forth in payment of individual claims re- 
sulting from innumerable sales and purchases, great bank- 

262 



INTERNATIONAL TRADE 263 

ing houses have developed a system by which the greater 
part of such transactions are effected without the use of 
money at all. The system of international exchange is 
quite like that of the clearing house, which has already been 
explained. When an American exporter sends goods to an 
English importer, there are two methods by which payment 
may be made. More commonly the exporter " draws on " 
the importer for the agreed amount; that is, he writes an 
order upon the importer to pay on demand, or within a 
specified time, the amount named in the face of the bill. 
This bill of exchange, attached to a bill of lading of the 
goods and other documents, the exporter usually sells to a 
bank, which thus purchases a right to have a certain amount 
of money paid at its order in England. The other method 
of closing such a transaction is for the English importer to 
go to an English bank and there purchase a draft drawn by 
the bank upon an American bank in favor of the American 
exporter. In either cage, if the transaction stood alone, 
money would have to cross the ocean to pay for the goods. 
But, as a matter of fact, English exporters are at the same 
time shipping goods to American importers, and are thus 
securing counter claims upon Americans. It is evident 
that if the claims upon the one side equal the claims upon 
the other, no money need be sent, provided the various 
claims are brought together and cancelled. It is precisely 
this function that banking houses doing an international 
business perform. They buy bills from exporters and sell 
drafts to importers. 

We have here assumed that only two countries are parties 
to the international exchange. When we consider the case 
of several nations or of all, there is no difference except in 
the greater complexity. Thus it is evident that if A in 
New York owes a sum of money to B in London, while C 



264 ELEMENTARY PRINCIPLES OF ECONOMICS 

in London owes the same amount to D in Paris, and E in 
Paris in turn owes the same amount to F in New York, the 
debts of all may be settled without a cent of money leaving 
any one of the countries. 

Because of England's early and continued leadership in 
international trade, and also because of her preeminence 
in shipping, drafts on London, known as sterling exchange, 
generally have the widest and readiest acceptance. Thus 
a Hong Kong merchant is likely to pay a New Hampshire 
cotton goods exporter by an order on a London banker 
rather than on a Boston or New York bank. London is 
therefore often spoken of as the " world's clearing house." 

The Rate of Exchange. — Perhaps the idea of an exchange 
rate may be understood best by thinking of it as the rate 
at which a person in one place can buy money in another 
place. In our everyday experience we usually find that 
we can buy $10 in a place a few miles away by paying $10 
in our own town. In other words, we can send our check 
for $10, which will be cashed without discount or premium. 
We might say in such a case that exchange between the 
two places is at par. But, if you read the fi.nancial columns 
of the newspapers, you will note that inland exchange be- 
tween places more remote is often above or below par, i.e. 
at a premium or at a discount. Thus a New York paper 
may quote Chicago exchange at a discount of fifteen cents, 
which means that $999.85 in New York will then buy 
$1000 of Chicago money. The case is essentially the 
same in. international exchange. Exchange between New 
York and Montreal offers no difficulty because the United 
States and Canada have the same monetary unit. When 
the exchange is between two countries having different 
systems of money, the rate of exchange has the same mean- 
ing, the only difference being that the ratio is between two 



INTERNATIONAL TRADE 265 

different money names, as between dollars and sovereigns, 
— always stated in terms of dollars and cents ; or between 
dollars and francs, — stated in terms of francs and cen- 
times, — or between dollars and reichmarks, — stated in 
terms of the cents paid for 4 reichmarks, etc. Now, since 
the English gold sovereign or pound has the same number 
of grains of fine gold as $4.8665 in American money, par of 
exchange between New York and London is said to be 
$4.8665. That is, when exchange is at par, a London pound 
will buy $4.8665 of New York money or debt, and con- 
versely $4.8665 in New York will buy a pound of debt or 
money in London. 

Par of exchange between any two countries is the rate which 
brings their two monetary systems to an equality. 

Whenever exchange between any two countries is such that 
a resident in one can extinguish a debt due in the other by a 
payment representing the exact gold weight of the value of the 
debt, exchange is said to be at par. 

The Balance of Trade. — Assuming for the moment that 
the only transactions affecting international exchange are 
the exports and imports of commodities, and that only 
two countries, say England and America, are involved, we 
can see that if at any time one country — America, for 
example — is importing more goods from England than it 
is exporting, the "balance of trade " is for the time " against " 
America. In such a state of things. New York banks will 
have many demands for drafts upon London and few offer- 
ings of bills on London. Conversely, London banks will 
have many offerings of bills on New York, but few de- 
mands for drafts upon New York. 

But it is the purpose of banks in both places to make 
drafts balance bills in order to avoid sending specie in pay- 
ment. Hence the New York banks will seek to discourage 



266 ELEMENTARY PRINCIPLES OF ECONOMICS 

the demand for drafts on London by charging a higher 
price for them, and will at the same time try to encom-age 
the offering of bills by paying a higher price for them. Lon- 
don banks will in the same way lower the price offered for 
bills on New York and will sell more cheaply drafts drawn 
by them on New York. Exchange is then said to be 
" against " New York and " in favor of " London. A 
New Yorker wishing to meet a debt of £l in London will be 
obliged to pay for the necessary draft more than S4.8665. 
He will have to pay a premium. A London debtor at the 
same time can with £1 extinguish a debt of more than 
$4.8665 in New York. 

The " Gold Points." — Except under very extraordinary 
conditions, — such as a great war, — neither New York 
nor London bankers will charge such a rate for drafts or 
pay such a rate for bills as will make it profitable for in- 
dividual debtors to send the specie or bullion instead of 
appealing to the banks. But there are even narrovv^er 
limits to fluctuations in the rate of exchange. The bankers 
themselves naturally have the best facilities for making 
shipments of money, and as the rate of exchange rises or 
falls, a point is reached at which it will be profitable for 
certain banks that specialize in the business to send the 
metal. The two points, above and below par, at which 
metal shipments are made into or out of any country were 
long known as the " specie points," because either silver or 
gold could thus be shipped ; but in recent years, since gold 
alone is now used to settle balances, the points have come 
to be called the " gold points." As the bankers' cost of 
shipment, including freight, insurance, packing, loss of 
interest, etc., is now about two cents per Enghsh gold pound 
on average shipments, the gold points in English-American 
exchange stand at about $4.8465 and $4.8865. In other 



INTERNATIONAL TRADE 267 

words, gold is likely to begin leaving New York when ex- 
change rises above $4.8865, and is likely to begin leaving 
London for New York when exchange falls belovv^ $4.8465. 

Again we must remind the student that for the sake of 
simphcity we have assumed trade to be confined to the 
two countries mentioned. When the case of international 
trade in general is taken into account, the subject becomes 
too complicated for brief explanation. We may simply 
say, then, that the rate of exchange between New York and 
London, London and Paris, Paris and Berlin, etc., is affected 
not only by the volume and balance of trade between the 
two countries, but also by the volume and direction of 
trade balances in the trade of the other nations. 

Automatic Steadying of Exchange. - — As a matter of fact, 
gold shipments between nations are surprisingly small and 
infrequent, considering the magnitude and diversity of the 
trade. This is because there is constantly at work an 
automatic system of " checks and balances " comparable 
to the delicate contrivances of automatic machinery. Thus, 
to illustrate, as soon as sterling exchange rises in New York 
above $4.8665, every prospective American purchaser of 
English goods or services is faced by the prospect of paying 
more than $4.8665 of American money for £1 worth of such 
goods or services. Whether he is contemplating the im- 
portation of English books, or is planning a visit to the 
English Lake Country, he is warned by the rise in the rate 
of exchange that he must now pay more than before. Of 
course few know or note the fact, but in the immense field 
of possible business between the two countries, it is enough 
that some persons do know and realize the change. Ameri- 
cans as a whole will buy fewer English goods. At the same 
time and by the same change every possible English pur- 
chaser of American goods of any sort may thus learn that 



268 ELEMENTARY PRINCIPLES OF ECONOMICS 

he can extinguish a possible indebtedness on better terms. 
Thus, if he is thinking of buying American goods hsted at 
$486.65, he may discover that at the new rate of exchange 
he could extinguish the debt incurred in purchasing them 
by paying in London less than £100. Here again it is un- 
necessary to assume that all Englishmen are aware of the 
changed rate or are influenced by the change. But it is 
clear that the rise in the rate makes it easier for Americans 
to sell to England and harder for them to buy from England 
than before. The resulting stimulation of sales and check 
upon purchases will increase the offering of bills on London 
against English purchases and lessen the demand for drafts 
on London in payment of American purchases. This in 
turn will tend to bring the rate of exchange back to par. 

The Safety Valve. — If, however, this automatic check 
at any time is not strong enough to hold exchange within 
the gold points, when one of those points is reached, 
the " safety valve " of gold shipment automatically opens 
and " lets off the steam." Let us suppose, for example, 
that sterling exchange has risen in New York to $4.89, and 
that considerable gold shipments are being made by New 
York bankers. The London banks find their gold reserves 
increased and are encouraged to increase their loans to 
customers in the form of greater deposits. New York 
bankers, finding their gold reserves depleted, restrict their 
deposits by calling loans and granting new ones more re- 
luctantly. The whole country in each case feels the result, 
— in England by an increase in the medium of exchange, — 
both money and credit ; in America, by a corresponding 
restriction. English prices tend to rise; American prices 
tend to fall. Hence results an even greater tendency to 
increased English buying in America, and to lessened Amer- 
ican buying in England. To be sure, the change in prices 



INTERNATIONAL TRADE 269 

is so slight that it is not ordinarily noticed. It might 
perhaps be said rather that Englishmen desiring to buy 
American goods find it easier to get the " money " with 
which to buy, while Americans are finding that money is 
" tight," and hence buy less. In whichever way the situa- 
tion is described, the practical result is the same, to pre- 
vent the rate of exchange from rising more than a very 
little above the gold point and ultimately to bring it 
back to par. And of course the same explanation, with 
the necessary change of names and terms, would apply to 
the opposite case of sterling exchange in New York falling 
below par. 

Actual conditions are of course indescribably more com- 
plex. Trade is not confined to two nations ; international 
balances depend upon other things as well as upon the 
transfers of goods ; the currency of different nations is 
not in all cases of equal stability or honesty ; many nations 
are themselves great producers of gold and therefore regular 
exporters of that metal. Still it remains true that through 
the operation of such natural causes as we have just de- 
scribed, the various debts of one nation to the world and 
the debts of the world to that nation do in the long run 
tend strongly to balance; and that gold shipments from 
nation to nation are relatively small. 

Such sliiyment as does take place serves the economic function 
of distributing and redistributing the world's stock of gold 
among the nations according to their only sloivly varying 
monetary needs, in such a way as to maintain a substantially 
even general price level throughoid the industrial tvorld. 

The above explanation should make it clear to the student 
once for all how ridiculous is the common idea that any 
nation either does or can become rich by " selling more 
each year to the rest of the world than it buys, storing up 



270 ELEMENTARY PRINCIPLES OF ECONOMICS 

the gold paid on balance." Even the individual man in 
our day does not " get rich " in such a way. If he is paid 
more than he pays out for consumable goods, he spends the 
extra money at once in buying productive or other goods. 
He does not store up the money. It must be admitted, 
however, that an individual could get rich by storing up 
money if he were foolish enough to choose that way, and 
were lucky enough to find the things or services he could 
sell more valuable than the things he had to buy. But he 
could get rich in this way only because his " pile of gold " 
would be so very small as compared with his country's 
" pile of gold " and mass of credit that prices of goods 
would not be distm-bed appreciably by his hoarding. With 
nations, as we have seen, the case is different. If America 
could — as she cannot — go on year after year selling 
much abroad, buying little from abroad, and storing up the 
difference in gold, the result would simply be that American 
prices would go up by leaps and bounds. As a people we 
should have a great deal of money, but we could buy 
no more with our gold, — we should be no richer. Let 
it be repeated, however, that we could not do what we 
have for a moment assumed; for, as our prices rose, it 
would become impossible to keep on selling our high- 
priced goods in other countries or to prevent our people 
from buying their goods in the low-price markets of other 
countries. 

War and International Exchange. — The explanation here 
given of international trade and international exchange is of 
course based upon the assumption of peace among the 
trading nations. Modifications would obviously have to 
be made in case of war. Thus during the great European 
war the cost of gold shipment no longer exercised a decisive 
influence in determining the gold points. Instead, the gold 



INTERNATIONAL TRADE 271 

points may be said to have been determined by the arbitrary 
action of governments and powerful banking coaHtions. 

During that war the belhgerent nations counted it a 
matter of life and death to keep as many men as possible 
in the trenches. With their labor supply thus depleted, the 
nations found it almost or quite impossible to produce food, 
clothing, and munitions for their soldiers in addition to the 
goods required by the workers and the rest of their people. 
Under these circumstances, every nation tried desperately 
to draw upon the productive resources of neutral peoples. 
But they were obviously in no position to pay for the un- 
usual merchandise imports with even their usual merchandise 
exports. They might, to be sure, have paid for part of the 
excess by heavy shipments of gold ; and indeed the United 
States during the first thirty months of the war did import 
over $600,000,000 of gold. But " the balance of trade in 
favor " of neutral nations was far in excess of this amount. 
To have attempted to ship more than this amount, — in- 
deed the shipment even of such an amount, — was of almost 
equal danger and disadvantage both to the belligerents and 
to the United States, as was everywhere seen and admitted 
by intelligent American bankers. 

Under these circumstances, the rate of exchange between 
New York and London fell and long continued below $4.75, 
and even at one time reached $4.50. A simple explanation 
would be to say that for the time being England was un- 
able to continue paying for desired imports in cash, and 
was therefore compelled to pay a higher price for the goods, 
— on credit, — as reflected in the unfavorable exchange 
rate. 

When the London rate fell below $4.60, the difiiculties 
of trade became so great for both countries that a half- 
billion dollar Anglo-French loan was negotiated with Amer- 



272 ELEMENTARY PRINCIPLES OF ECONOMICS 

ican bankers. This provision for regular and national 
credit, taking the place of the earlier irregular and individ- 
ual credit, enabled English importers to buy American goods 
on more favorable terms, — in other words, raised the rate 
of exchange nearer to parity. 

During the nineteenth century and the early years of the 
twentieth century, English shipping had been so dominant, 
and English investment and commerce had been so great 
and widespread over the earth, that it had become cus- 
tomary to make payments everywhere by drafts or bills 
on London, drawn in terms of pounds, shillings, and pence. 
Thus, a Chinese importer would pay even an American 
or French exporter by a draft drawn on London. The dis- 
turbance wrought by the war threatened the continuation 
of this practice. New York, the money capital of the 
greatest and wealthiest neutral, offered certain advantages 
as an exchange center or world's clearing-house, and to an 
increasing extent drafts in payment of international pur- 
chases were drawn on that city, in terms of dollars and 
cents. This is what is meant when it is said that the great 
war threatens to substitute " dollar " exchange for sterling 
exchange in international trade. 

Peculiarity of International Trade. — As was said at the 
beginning of this chapter, international trade is not funda- 
mentally different from other trade or commerce. But it 
has certain features which are in varying degree peculiar. 
Labor and capital move from place to place or from industry 
to industry with a far greater degree of freedom within 
national boundaries than across national boundaries. Differ- 
ences of language, customs, and laws, ignorance, fear, prej- 
udice, poverty, sentiment; these and a host of other in- 
fluences stand in the way of migration of labor and capital 
from country to country. 



INTERNATIONAL TRADE 273 

Capital on the whole is probably more mobile than labor. 
Both move more freely from some countries than from 
others ; more freely to some countries than to others. Both 
move more freely at some times than at others. On the 
other hand, freedom of movement is of course not complete 
even within a single country. A New England worker is 
tied to his town, state, and section by a multitude of ties. 
Capitalists who have made their money in pork may not 
be eager to invest in establishing a " Journal of Opinion " 
or a " Journal of Civilization." But allowing for all these 
difficulties in the way of a hard and fast classification, it 
none the less remains true that labor and capital, generally 
and in a peculiar degree, are nationally confined. And this 
broad fact has necessitated certain economic explanations, 
certain economic theories, which we must now seek to under- 
stand. 

The Doctrine of Comparative Costs. — The first of the 
theories to which we have just referred is known in economics 
as the " doctrine of comparative costs." It may be briefly 
stated as follows : trade behveen any two nations is deter- 
mined, not by difference in the absolute cost of producing the 
goods exchanged, but by difference in their comparative cost. 
Specifically, each nation will produce for export those goods 
in the production of which it enjoys the greatest comparative 
advantage, or suffers the least comparative disadvantage. And 
now to illustrate and explain. 

Let us, as before, assume that there are only two countries, 
A and B, and let us assume further that in each country 
only two economic goods are concerned, x and y. Let us 
assume further that in A, 1 unit of x can be produced with 
1 day's labor, and 1 unit of y with 2 days' labor; while 
in B, 1 unit of x requires 2 days' labor, and 1 unit of y 
requires 5 days' labor. 



274 ELEMENTARY PRINCIPLES OF ECONOMICS 

If trade were determined by difference in absolute cost, 
no trade could take place on these assumptions between 
A and B. A would produce and consume 
^ ^ both X and y, which would exchange within 

^ 1 "^ — 2 the country in proportion to their absolute 

y 2 — >- 5 cost, i.e. in the value ratio of 2 units of 

X for 1 unit of y. B would produce and 
consume both x and y, which would exchange within the 
country at the value ratio of 2^ units of x for 1 unit of 
y. To test the matter numerically, let us assume in each 
country 2100 days' labor available in any period for pro- 
duction. Assuming now for a moment that each country 
produces both goods, let us see how the case would stand. 
In A 700 days spent in producing x would give 

700 units of x; 
1400 days spent in producing y would give 

700 units of y. 
In B 600 days spent on x would result in 

300 a:; 
1500 days spent on y would result in 

300 2/. 
Without trade, then, A could have by the assumed division 
of its labor, 700 y -f 700 y, 

and B could have 300 x + 300 y. 

And now let us suppose instead that the doctrine of com- 
parative cost is correct, according to which A would produce 
and export y, while B would produce and export x. A's 
2100 days' labor would give 1050 units of y. If she kept 
and consumed only what we have assumed in the first case 
she would have had for consumption, she would have left 
350 units of y for export and would gain by the trade by 



INTERNATIONAL TRADE 275 

importing in exchange anything more than 700 x. B in 
the same way would produce with 2100 days' labor 1050 x; 
and if she kept for consumption the same amount as in the 
illustration above, 300 x, she would have left 750 x for 
export, and would gain by the trade by importing in ex- 
change anything more than 300 y. Bringing the two to- 
gether, now, we find that A can afford to sell 350 y for 
anything above 700 x, while B can afford to sell 750 x for 
anything more than 300 y. Between these two value 

ratios — f =- ) and — ( =- ) i.e. the ratios of absolute 

350 V 2/ 750 V 5 J 

costs in the two countries respectively, — both nations can 
gain by exchanging. Where the ratio of exchange — in 
other words, the international values — v/ould stand in such 
a case, and how the ratio would be determined, remain to 
be considered later. For the moment let us center our 
attention upon the fact here demonstrated : Even though 
in one of tivo countries the absolute cost of production of every 
commodity were greater than in the other, yet exchange would 
take place hetioeen them if the comparative costs were different, 
the one country producing and exporting the commodities in 
the production of which it had the least relative disadvantage, 
and importing in exchange commodities in the production of 
which the other country's relative advantage was greatest. 
And the ratio of exchange — in other words, the vahie — would 
in each case he somewhere between the differing ratios of ah- 
■solute cost in the two countries. 

International Values. — We are now prepared to consider 
the second of the theories or explanations that arise from 
the immobility of labor and capital as between nations. If 
goods do not necessarily exchange in international trade 
in the ratio of their cost of production, what does deter- 



276 ELEMENTARY PRINCIPLES OF ECONOMICS 

mine their value, — that is, their ratio of exchange ? W2 
have just seen that the ratio or value may be anywhere 
between the two ratios of absolute costs that would obtain 
if each nation produced both commodities. Let us now go 
a step farther. 

Let us suppose that in one of two countries just beginning 
to trade with each other it is found that the greatest satis- 
faction of wants results when raw cotton and manufactured 
silk are produced by an expenditure of labor indicated re- 
spectively by 15 cents a pound and 50 cents a yard, but 
that in the second country it is just worth while to produce 
the same commodities at 10 cents a pound and 75 cents a 
yard respectively. Assuming these to be the only two 
commodities to be exchanged and ignoring the cost of 
transportation, we may suppose matters to proceed as 
follows : Silk will be sent from the first country to the 
second in exchange for cotton. The price of the silk will 
be somewhere between 50 and 75 cents ; that of the cotton 
between 10 and 15 cents. The precise value in each case 
will be such that in the long run the values of the cotton 
and silk exchanged will be equal. Suppose it were not so; 
imagine such prices that $1,000,000 worth of silk would 
be exported from the first country and only $500,000 worth 
of cotton imported. At first the balance might be paid 
in gold, but the drain of gold from the second country 
would so lower prices there as to discourage the further 
importation of silk, and the influx of gold into the first 
country -would so raise prices as to encourage the importa- 
tion of cotton into that country. This would continue 
until an equilibrium was established. 

If now we take the case of many commodities instead of 
two, the explanation still holds. This theory or explana- 
tion, then, may be summed up as follows : Values in inter- 



INTERNATIONAL TRADE 277 

national trade will be such as to equate reciprocal international 
demand, and equate the general level of prices in the trading 
countries. This theory, clearly developed by John Stuart 
Mill, is known as the theory of the equation of international 
demand. 

The Advantages of International Trade. — We have 
already explained that international trade does not offer 
to any nation the possibility of " getting rich " by heaping 
up " treasure " secured from a so-called favorable balance 
of trade. The real advantage in international trade is 
that (1) it enables every country to enjoy goods which it does 
not itself produce; and (2) enables each country to secure a 
maximum of satisfaction and an economy of its efforts and 
resources by devoting its resources and energies to the forms of 
production in ivhich it enjoys the greatest relative advantage, 
or in which at worst it suffers the least relative disadvantage. 

II. Restrictions on International Trade: Protec- 
tionism 

Objects of the Restriction. — Nations have always laid 
restrictions upon international commerce, and an examina- 
tion of the history of such restrictions discloses at least 
four motives for imposing them. (1) In the first place, 
we may note that ancient nations, the Greeks, the Hebrews, 
and others, dreaded contact with foreigners, and attempted by 
restrictions on international trade to reduce such contact 
to a minimum. (2) A second very common cause of re- 
striction has been the desire to make international trade a 
source of revenue. Sometimes a tax has been laid upon 
both exports and imports. England taxes imports with a 
sole view to securing the greatest possible revenue. (3) In 
the third place, tariffs have at times been laid with the 



278 ELEMENTARY PRINCIPLES OF ECONOMICS 

idea of securing a supply of the precious metals, through a 
so-called " favorable balance of trade." No enlightened 
nation now pursues this course. (4) Finally, many nations 
to-day regulate international commerce with the object of 
securing revenue, and at the same time weakening foreign 
competition, in order that home producers may be encouraged 
and supported. Restriction for this purpose takes the form 
of laying duties upon imported commodities of a kind that 
can be produced in the home country. Such taxes are 
called protective. Collectively they form what is called a 
protective tariff. Home producers, it is said, are thus 
" protected " against foreign competitors. Of course in 
some cases it is possible that more than one or even all of 
the objects of regulation that have been mentioned may be 
sought by the country which thus regulates its commerce 
with other nations. 

The general subject of protection is so vast that a com- 
plete discussion of it would fill volumes. We must be 
content here to study briefly the chief points in controversy 
between advocates and opponents of the system, to give 
attention to certain general considerations of importance, 
and to suggest what desirable changes may be made in the 
American tariff system upon which all should unite. 

Argument of Protectionists. — Protectionists argue that 
the system which they favor promotes nationalism, or a 
strong sense of national unity. Domestic trade, they say, 
should be encouraged because it draws the citizens of a 
country "together, while international trade is cosmopolitan 
and tends rather to the separation of citizens one from 
another. It is argued that nationality and a strong national 
feeling depend upon a sense of national strength and in- 
dependence, which can exist only when the nation has 
widely diversified industrial interests, and therefore pro- 



INTERNATIONAL TRADE 279 

"tective duties should be levied to encourage such a diversifica- 
tion of industry. American protectionists insist that in a 
new country there exist many great natural advantages of 
which the inhabitants cannot avail themselves unless they 
are protected, at least temporarily, from the competition 
of foreign producers, who have the advantage of long ex- 
perience. The (1) diversified-national industry argument and 
the (2) protedion-to-inf ant-industries argument — the ones 
upon which protectionists most strongly insist — are thus 
seen to be supplementary. Protectionists urge that the 
older nations, by reason of their acquired skill and capital, 
can destroy in their infancy any new pursuits that a younger 
rival is seeking to establish. Closely connected with this 
argument is another based on (3) military grounds. In- 
dustrial self-sufficiency is a great aid to a nation in times 
of war, because such a condition lessens the distress due to 
possible military disasters. Hence it is claimed that nations 
at peace should prepare for war by protecting, nursing, and 
fostering the widest possible range of domestic industries. 
The force of this contention was admitted by Adam Smith, 
who is frequently called the Father of Political Economy and 
who has probably done more for free trade than any other 
man, and it was emphasized by George Washington. In our 
own time, the great European War has given new significance 
to this argument and has shown, as many think, that adequate 
industrial self-sufficiency has a far wider scope than people 
heretofore were willing to admit. (4) The home market is also 
claimed to be superior because more secure, — less liable to 
the shock of war or international complications. (5) Special 
advantages are said by the protectionists to be conferred by 
their system upon farmers, who are saved the expense of long 
shipment when they have a sufficient market for their crops 
among home manufacturers. It has even been maintained 



280 ELEMENTARY PRINCIPLES OF ECONOMICS 

by one American protectionist (6) that no nation can be 
permanently prosperous unless the elements taken from the 
soil are returned to it in the form of manure and other 
fertilizers, and that this process of repair is possible only 
when agricultural products are consumed at home. Another 
common protectionist argument, which has been much used 
since the labor movement first became prominent, is (7) that 
the protective tariff has been the cause of high wages paid to 
American labor, and that it will be necessary to maintain 
the protective tariff if we would maintain the high wages. 

Differences in the economic situation of other countries 
lead in them to certain protectionist arguments that differ 
from those in the United States. For example, in Germany 
it is urged that under free trade in grains, the German pop- 
ulation will increase beyond safety so long as the rich new 
lands of Canada, Argentina, and other parts of the world are 
being wastefully exploited in " robber " agriculture. At 
length, the argument runs, these lands will have to give up 
such wasteful methods, and the price of foodstuffs must in- 
evitably rise. Hence, it is argued, by imposing a tax on im- 
ports of foodstuffs, a greater proportion of the German 
people will be induced to continue careful farming, and pop- 
ulation will be held in check. Also the military argument is 
strongly emphasized in Germany, and Germans probably 
believe generally that the situation in which the European 
War has placed them amply justifies their policy. 

In England, in recent years, emphasis has attached to the 
argument, that imperialism, which could be furthered by 
tariff concessions granted to one another by the mother 
country and her several self-governing colonies, is prevented 
by the English free trade policy, since that policy gives no 
room for tariff concessions. A further argument frequently 
put forward in England, to much the same effect, is that 



INTERNATIONAL TRADE 281 

with a system of protective tariffs England would be able 
to secure trade favors from other nations by playing her 
trade restrictions against theirs. And in England also the 
argument from military grounds has greatly strengthened 
the protectionist sentiment. 

The Argument against Protectionism. — The name " free 
trader " is generally applied to the opponent of protection- 
ism, but " free traders " in the strict sense of the term are 
in fact hardly to be found. Practically all of those who 
are called by the name are really advocates of a policy 
which is properly described as that of a " tariff for revenue 
only" And many even of this group would be willing to 
see the tariff schedules so chosen and framed as to allow 
incidentally a certain measure of protection. 

A thoroughgoing " free trader " would have no tariffs 
on imports. His argument would run about as follows : 
Taxes on imports, with very few exceptions, are borne 
by home consumers. Therefore, in the last analysis, the 
people of any nation must pay their own expenses; they 
cannot shift them to the shoulders of foreigners. Taxing 
imports is therefore a vicious policy because it leads people 
to think that others are paying the taxes. Moreover, taxes 
on imports are indirect taxes, paid by the importer, but 
shifted by him in higher prices to the final consumers. 
Indirect taxes, it is argued, are furtive, dishonest, undemo- 
cratic, inequitable, bearing with relatively greater weight 
upon the poor. Such taxes restrict international commerce 
and stand in the way of international good-feeling, friendship, 
and peace. If the burning of all our customs houses would 
prevent a single war, the national gain would be incalculable. 

But, as we have said before, there are practically no free 
traders to be found, — not so many as the real merit of their 
argument would lead one to expect. 



282 ELEMENTARY PRINCIPLES OF ECONOMICS 

The argument that follows is not that of the " free- 
trader." It is rather the argument for a " tariff for revenue 
only." Perhaps, better yet, it might be called the argu- 
ment against protectionism. 

In opposition to protection it is frequently alleged (1) that 
protective tariffs are a violation of the " natural right " of 
every man to buy and sell wherever he will, untrammeled 
by human laws. We may dismiss this " natural right " 
argument at once as a " dogmatism in disguise." It is a 
question-begging argument, since, in the use of the word 
" natural," it assumes the very thing that must be proved 
before the argument can have weight. All history, and the 
opinions of all great modern thinkers, are against such an 
assumption. It would be well if this argument were heard 
less often. 

Again, (2) it has been claimed that protective tariffs in 
the United States are uTWonstitutional. But this argument 
is idle and futile. The opinions of our best jurists have 
always maintained the constitutionality of our tariff legis- 
lation, and there is not the slightest chance that the Supreme 
Court will ever pronounce a protective tariff unconstitu- 
tional. 

The really cogent arguments of the advocates of a 
tariff for revenue only are those w^hich aim to show that, on 
the one hand, the protectionist policy fails to accomplish 
the end sought ; and that, on the other hand, it actually 
does work positive injury to national interests. 

In the first place, (3) they claim that protection is not 
necessary to the development of national feeling. In proof of 
their claim, they point to the fact that the last half century, 
which has witnessed an unprecedented spread of inter- 
national trade, has also witnessed a wonderful growth of 
national sentiment throughout the world. 



INTERNATIONAL TRADE 283 

Opponents of protection claim also (4) that protective 
tariffs are not necessary to produce diversity of industry in 
the case of a country like ours. It may be admitted that 
a purely agricultural nation is not likely to progress rapidly ; 
but it is not easy to understand how a country so vast as 
ours, of so varied a climate, of boundless natural resources, 
could be anything but a country of diversified industry, if 
industry itself is left unhampered by burdensome restric- 
tions and regulations. 

The General Influence of Protective Tariffs. — But the 
fundamental, inclusive, and by all means strongest economic 
argument against protection is as follows : (5) whenever a 
new industry is started in any country as a result of a pro- 
tective tariff, it is started by withdrawing or withholding the 
necessary capital and labor from some other industry which 
is by nature more profitable, and therefore every such new 
industry really means a decrease in the possible productiveness 
and wealth of the country. 

This general argument in its affirmative form may be 
stated as follows : idth nations as with individuals each party 
to trade will regularly secure the greatest advantage if the trade 
is left unrestricted, since then and only then will the nation's 
labor and capital enter into those employments that are naturally 
most productive. 

It would seem in general that this statement must be true. 
If any proposed new industry has natural advantages that 
indicate the real economy of starting it, then there can be 
no reason for protecting it by a tariff wall against foreign 
competition. Hence the claim that the industry needs 
protection is itself an admission that it is an uneconomical 
industry. And if it is fundamentally uneconomic, because 
the labor and capital applied to it will produce less than they 
are now producing, then no tariff can make it economic. 



284 ELEMENTARY PRINCIPLES OF ECONOMICS 

Of course, this does not mean that those who invest in the 
protected industry cannot make profits. We could prob- 
ably force the production of bananas in Maiiie, tea in Indiana, 
and rubber in Oregon, if we prohibited importation of those 
goods, and offered to possible home producers a sufficiently 
high price. And the Maine banana grower might conceiv- 
ably be paid so much that he would make big profits. But 
his profits would clearly be at the cost of his fellows. The 
nation's capital and labor as a whole would be made less 
productive. The growing of such products would be against 
public economy. 

By way of qualification, most economists admit that such 
new industries may attract to the country some foreign 
capital which would otherwise be invested elsewhere. They 
also admit that new industries are sometimes prevented, 
not by lack of natural advantages, but because they cannot 
at once acquire the specialized skill and capital which the 
foreign competitor enjoys by reason of his longer establish- 
ment ; and that if such " infant industries " rapidly reach 
a condition of self-supporting independence, the nation may 
be repaid for the expense incurred in hastening the estab- 
lishment of such industries. But they justly protest against 
applying the name " infant industries " to businesses that 
have received tariff protection from the country for nearly 
a century. Indeed, (6) the fact that " infant industries " 
have thus prolonged the period of their infancy, and, in 
some cases, have clamored for protection even when they are 
or should be self-supporting, furnishes one of the strongest 
arguments against a policy of protection. If such industries 
do not become self-supporting, they continue to hold prices 
up beyond a reasonable point ; if they do become able to 
withstand competition, but still have protection, they may 
by combining maintain a higher price than open competition 



INTERNATIONAL TRADE 285 

would establish. The last few years have shown beyond 
question that protection favors monopoly by shutting off 
healthful international competition. It has usually been 
claimed by protectionists that the competition of home 
producers would suffice to keep prices down. Now, how- 
ever, we are confronted by the obstinate fact that in the 
case of a number of protected industries, combination is 
taking the place of competition ; and home producers 
compete at low prices in foreign markets, while charging 
their countrymen such higher prices as protection enables 
them to exact. 

Does Protection protect Labor ? — It is further main- 
tained (7) that the argument of the protectionists that a 
protective policy benefits the laborer will not bear close analysis. 
For nearly two centuries before any protective tariff existed 
in what is now the United States, the high wages of American 
workingmen had been repeatedly noted and explained. 
Land could be had for the asking, and men would not con- 
sent to work for hire unless they could receive a wage high 
enough to tempt them away from independent peasant 
proprietorship. The same condition has existed during the 
last century, and almost dov*^n to the present day. The 
whole question of the connection between the tariff and 
wages involves a discussion of many complex economic 
problems. It must be sufficient here to suggest a single 
important consideration bearing upon this question. Labor 
competes directly, not with commodities, but with labor. The 
worker himself wants commodities, and the more of them he 
can secure for his labor, the better. In other words, it is 
not high money wages alone but high wages in connection 
with low prices that indicates national welfare and pros- 
perity. If, then, labor is to be protected, a tax should be 
put on the importation of labor rather than upon the prod- 



286 ELEMENTARY PRINCIPLES OF ECONOMICS 

uct of labor. Otherwise, the workman may find his wages 
lowered by the competition of a multitude of imported 
workers, while he finds the cost of living unduly raised by 
the protection which has been granted to the domestic 
entrepreneur. 

The Political Argument. — Our statement of the argument 
would be incomplete if it did not find a place for what many 
regard as the strongest indictment against protectionism. 
Opponents of that system hold it responsible for a great 
part of the corruption alleged against government in the 
United States. According to this view, the vested interest 
in established protection has been the very center of the 
forces of vested interests of all sorts that have constantly 
beset Washington to seek new and valuable privileges and 
to safeguard those already conferred upon them. Although 
this may be an exaggerated statement of the evil, it can 
hardly be doubted that (8) protectionism as a system has 
done much to increase the difficulty of securing jv^t and honest 
government. 

The Fiscal Argument. — Finally, it is contended against 
protectionism that (9) a tariff" for revenue only is to be pre- 
ferred on purely fiscal or financial grounds. In support of 
this contention, it is claimed that such a tariff, in contrast 
with a protective tariff, would tax fewer commodities, would 
be simpler to compreJiend and to administer, and would cost 
much less per dollar of revenue collected. 

General Considerations. — Certain general considerations 
remain to be suggested. In the first place, the importance 
of this whole question has been much exaggerated. England 
prospers with a tariff for revenue only, the United States 
has prospered under protection. How far England's pros- 
perity has been due to her tariff system, how far the pros- 
perity of the United States has been in spite of protection, 



INTERNATIONAL TRADE 287 

we cannot tell. The tariff system is one of very great, but 
not of vital, importance. Moreover, the domestic trade of 
the United States is vastly greater and more important 
than her foreign trade. Indeed, the domestic trade of the 
Mississippi valley alone is far greater than our entire foreign 
commerce. Under the federal constitution, all trade among 
the states is free trade. Evidently, then, we can thrive 
as we have thriven under protection, since by far tlie greater 
part of our trade is already free trade. 

In the second place, statistics regarding national pros- 
perity, as they are usually presented, throw little light upon 
the question one way or the other. The tariff policy of 
modern countries has undoubtedly been a minor factor in 
their industrial life. Inventions and discoveries, the spread 
of general and technical education, the hopeful ambition of 
all classes of our people, the growth of intelligence, have 
been chief among the forces that have made such astounding 
additions to the wealth of the world during the past century. 

In the third place, the American tariff system, bad as it 
undoubtedly is in many respects, is a historical growth that 
has taken deep root. It conditions directly or indirectly a 
great part of our industrial life, and it cannot therefore be 
suddenly eradicated with impunity. Yet it is impossible 
to tolerate permanently a bad condition of things, and we 
are justified in demanding that there shall be progress in 
our tariff policy. Even selfish considerations are likely to 
lead to a further demand for lowering our tariff schedules, 
now that, other powerful nations are retaliating or threaten- 
ing to retaliate for our unneighborly tariff treatment of them. 

Finally, for the reasons above indicated and for many 
others, it seems in the highest degree desirable that tariff 
changes in future should be less the football of partisan 
politics and more the subject of intelligent expert study. 



288 ELEMENTARY PRINCIPLES OF ECONOMICS 

It is of course impossible, as it is undesirable, that in a 
democracy so great a question as that of the tariff should 
be removed from politics ; but the politics should be clean 
pohtics that would accord a large place to expert opinion 
and advice. In other words, all future tariff legislation 
should be initiated by an expert tariff commission, — pref- 
erably permanent, — which should carry on its investiga- 
tions under conditions of the fullest publicity and keep the 
public regularly informed of changing conditions on which 
changes in tariffs should be based. The people of the United 
States seem now to have reached general agreement regarding 
this matter, and such a Tariff Commission as is here advo- 
cated has already (in 1916) been established by Congress. 

SUMMARY 

1. International trade, in its elements a trade among individuals 

for money, is in final effect a trade among countries of serv- 
ices for services. 

2. The balance of trade is the chief element in determining the 

rate of exchange. 

3. International trade is peculiar in that labor and capital do not 

flow from country to country so readily as from section to 
section of the same country. 

4. International trade depends not on differences in absolute cost 

but on differences in comparative costs. 

5. International values are determined by the equation of re- 

ciprocal demand. 

6. General prices and the national money supply are regulated 

by trade conditions. 

7. Regulation of international commerce, for widely varying 

reasons, has been common among nations. 

8. Protection is defended as promoting nationalism, diversifica- 

tion of industry and industrial independence, saving costs 
of transportation, keeping up the soil, and maintaining 
high wages. 

9. It is attacked as being unnecessary to the development of 

industry, as opposed to "natural rights," and as being 
unconstitutional. It is further claimed that a protective 
tariff regularly diverts labor and capital from industries 



INTERNATIONAL TRADE 289 

that are more productive by nature to industries in wHch 
the employment of labor and capital is naturally less pro- 
ductive. 

10. Protection often fosters and protects monopolies, and is a 

source of political corruption. Fiscal considerations strongly 
favor a revenue tariff system. 

11. Our tariff system, as a historical growth, must be modified 

conservatively and carefully. 

QUESTIONS FOR RECITATION 

1. What are the advantages of international trade? 

2. How is the rate of exchange determined? What is meant 

by "par of exchange"? What are the "gold points"? 

3. What relation has international trade to the distribution of 

money among nations? To general prices in different 
countries ? 

4. What goods does a nation export? What is the doctrine of 

comparative cost? 

5. How are values determined in international trade? 

6. What is protection? Discuss the arguments offered in its 

support. In opposition. 

7. What is the argument of the thoroughgoing free trader? 

8. Why have American wages always been high? What bearing 

has this on the protection argument? 

9. What is the political argument against protection? The fiscal 

argument ? 
10. What objections are there to a sudden change in the tariff 
system ? 

QUESTIONS FOR STUDY AND DISCUSSION 

1. What is exchange parity between New York and Paris? New 

York and Berlin? New York and Hoboken, N.J. ? 

2. If one of two exchanging nations has a depreciated currency, 

what bearing has this on the rate of exchange ? 

3. What was the effect of the European war on the rate of exchange ? 

4. Is labor mobile within the United States? between the United 

States and Canada? between the United States and Turkey? 

5. What is meant by "timidity of capital"? 

6. Would it be economically desirable to-day to grow tea in the 

United States? With a prohibitive tariff on tea, might it 
be "profitable" to grow tea here? If tea were grown here 
behind the protecting waU of a tariff, with profit to the 



290 ELEMENTARY PRINCIPLES OF ECONOMICS 

growers, would that be a sufficient argument against abolish- 
ing the tariff? 

LITERATURE 

In favor of protection : — 
Carey, H. C. : Manual of Social Science. 
List, F. : National System of Political Economy, Introduction, and 

Bk. II, Ch. XVI. 
Patten, S. : Economic Basis of Protection. 

Thompson, R. E. : Protection to Home Industry, and Social Science 
and National Economy. 

Against protectionism : — 
Bastiat, F. : Sophisms of Protection. 
Perry, A. L. : Principles of Political Economy, Ch. VI. 
Sumner, W. G. : Protectionism. 

Taussig, F. "W. : Principles of Political Economy, and Some Aspects 
of the Tariff Question. 

Nearly all standard economic treatises on Economics arrive at 
a conclusion generally opposed to protectionism. In England and 
Germany some economists of repute have favored a protective 
policy for their own countries. A large body of literature on the 
question has been produced in those countries within recent yearSc 



PART IV. DISTRIBUTION 

CHAPTER I 
INTRODUCTORY 

The Meaning of the Word " Distribution." — Having 
studied first the human wants that lead to economic activity, 
and the satisfactions that result from consumption ; having 
studied in the second place the production of goods and 
services for the satisf actioii of human wants ; and having in 
the third place studied the subject of transfers of goods and 
services, and especially of their exchange among producers 
or between producers and consumers, we come now to a 
study of the distribution of the income of society, especially 
among the factors that have united in its production. Under 
the heading Distribution we might, and to some slight ex- 
tent shall, consider the division of the social income among 
individuals ; but that part of the entire subject of distribu- 
tion is so vast and so complex that we cannot in such a book 
as this attempt a complete treatment of it. 

There is one sense in which the word " distribution " is 
not used here. We shall not use the word in the sense of 
moving goods from the place where they are produced to 
the place where they are consumed. When we speak of 
railways or retail stores as " distributive agencies," we are 
using the word in a sense wholly different from that of the 

291 



292 ELEMENTARY PRINCIPLES OF ECONOMICS 

technical term which describes one of the four main divisions 
of economic analysis. 

Before passing on to study the determination of the great 
shares of the annual product of industry, it will be well for 
us to pause for a moment to consider certain general ideas 
that underlie all the special topics that are to follow. 

Social Wealth and Social Income. — All the economic 
goods that society has for use at any time constitute the social 
wealth. The satisfactions that fioio from the social wealth 
and services during any -period of time constitute the social 
income for that period. Social wealth is, therefore, a fund 
or reservoir from which issue one of the great streams of 
social income, the other proceeding from services. The 
body of social wealth in any two nations may be of the 
same volume, while the stream of social satisfactions may 
be of very different volume in the two cases; for the size 
of the social income depends not alone upon the size of the 
social wealth, but also upon the completeness with which 
that social wealth is utilized and upon the services rendered. 
Well-being, moreover, is increased by the satisfactions 
flowing from the use of free goods, and is not dependent 
merely on income. 

Private Income. — The social income is of course shared 
among the members of society. That part of the social 
income ivhich the individual enjoys is his real private income. 
The money which an individual receives during any period of 
time constitutes his money income or nominal income. It is 
important to keep this distinction in mind, since equality 
of money incomes may coexist with great inequality of real 
incomes, and vice versa. Thus it is a commonplace to-day 
that city workmen regularly receive higher money wages 
than the same classes of workmen in the country ; but the 
differences in cost of living would go far to make the real 



INTRODUCTORY 293 

incomes of the two classes equal. Again, a house occupied 
by its owner yields a real income to him, though this does 
not enter into his money income at all. 

Private Property. — Private incomes depend upon the 
institution of private property. Every change in the laws 
of property is bound to change to some extent the produc- 
tion and exchange of goods, and hence the amount of the 
social income, but to a still greater extent and more im- 
mediately every such change reacts upon the distribution 
of the social income among those who share it. The im- 
portance of our property laws is therefore evident. These 
laws have sometimes been of such a character that they have 
wrought injustice to great classes of people, e.g. the laws 
making human beings private property. 

The Shares and Share Receivers. — As we have said, 
the distribution on wliich attention will be centered in the 
following pages is the distribution of the product of industry 
among the great factors that have united to create it. The 
factors considered in the study of production were land, 
labor, and capital; and in that order we shall consider 
the distribution of the product among them. The shares 
of these three factors are known as rent, wages, and interest. 
But the entrepreneur — he who secures and directs the organ- 
ization of the factors — is also an important share receiver in 
modern industry, and hence we shall study the principles 
governing his share of the product, called profits. Some 
writers, in view of the great part played in all production by 
the State, treat separately the share received by the State. 
All that for our purposes needs to be said regarding the State's 
share in the product of industry will be presented in the final 
chapters of the book, under the head of Public Finance. 

Relation of Individuals to the Four Shares. — And now 
just a word as to the relation which share distribution bears 



294 ELEMENTARY PRINCIPLES OF ECONOMICS 

to distribution among individuals. Individuals regularly 
receive their incomes by virtue of their proprietary relation 
to one or more of the factors of production. Thus, when we 
are discussing the share of the annual produce that goes 
to land, we are at the same time explaining the principles 
which determine the size of the rent income of the farmer 
himself. Similarly, an inquiry into the shares received by 
capital, labor, and entrepreneurship brings us more or less 
closely to the question of the income of the individual 
capitalist, laborer, or entrepreneur. But it is the share of 
the factor as a factor that we shall study primarily, noting 
only incidentally the results of the distribution upon the 
income of individuals. The importance of this distinction 
appears when we reflect that a justification of the share of 
industry that goes to land or capital is not a justification of the 
landlord's or the capitalist's income, unless the possession of 
the land or capital is also justified. 

Explanation not Justification. — What has just been 
written suggests a further caution, which cannot be too 
strongly emphasized. This book is devoted mainly to an 
attempt to analyze existing economic arrangements, and to 
explain how economic forces operate in the industrial world, 
as it is to-day, and based as it is on certain great social and 
legal institutions, suxih as private property, contract, etc. 

Now the mind has a vicious habit of confusing explanation 
with justification. Having explained, too easily we allow 
ourselves to think that we have thereby justified. But ex- 
planatioji and justification are really quite different and 
distinct things. Thus, in the chapters to follow, we must 
never lose sight of the fact that we are merely explaining or 
trying to explain rent, interest, wages, and profits. Their 
justification or condemnation, while it should properly be 
based on a correct explanation, must also be based on a 



INTRODUCTORY 295 

multitude of economic, ethical, political, and other con- 
siderations. In this book we can afford hardly more than 
a bare reference to some of the most important of such 
considerations. 

SUMMARY 

1. Distribution is that part of economies which deals with the 

division of the social income, especially among those repre- 
senting the different factors of production. 

2. Our modern system of distribution depends directly upon our 

institution of private property. It is therefore along the 
lines of changes in private property that improvement of 
distribution is, in part, likely to come. 

3. Private income is the individual's share of the social income. 

Real income consists of commodities and services which the 
individual has for his consumption. Money income is the 
money received by an individual during any period of time. 

4. Explanation of income shares is not justification of income 

shares. 

QUESTIONS FOR RECITATION 

1. What is distribution? What problems does it seek to solve? 

2. What is the relation of private property to distribution ? How 

is this illustrated in the case of land ? In the case of capital ? 

3. If a physician's practice is worth $10,000 a year, what is his 

money income? Mention some of the things that probably 
go to make up his real income. 

4. What other persons are likely to enjoy a part of this income? 

5. Distinguish between explanation and justification of the actual 

distribution. 

QUESTIONS FOR STUDY AND DISCUSSION 

1. Analyze the total annual product of industry to show the net 

social income for consumption. 

2. Is all the net social income distributed ? 

3. How do children receive their income? Paupers? Semi- 

paiipers? Prisoners? Professional thieves? 

LITERATURE 

Ely, R. T. : Property and Contract in their Relation to the Distribu- 
tion of Wealth, 2 vols., especially Vol. I, Pt. I, Chs. I-III. 
MiU, J. S. : Political Economy, Bk. II, Ch. II, §§ 1, 2, and 3. 



CHAPTER II 
RENT 

As in the study of the factors or agents of production we 
first discussed the factor land, so here in our study of the 
distribution of the social income among the factors that 
contribute to its production, we may logically begin with a 
discussion of the return to the first factor. 

Meaning of the Term. — As used by economists, the 
word " rent " means that which is paid for the use of land 
or other natural agents. The popular meaning of the word 
" rent " is less exact. In everyday life we hear people use 
the word to describe that which is paid for the use of a house 
or other building. But such so-called rent contains two 
elements, one of which is not economic rent at all. The 
amount paid for the use of a house includes the amount paid 
for the use of the land upon which the house stands, which 
is economic rent; but it also includes payment for the 
investment of capital in the form of a building, and this 
latter return is therefore not rent, but interest. The reason 
for the popular confusion lies in the fact that both are usually 
paid to the same person. In some cities, however, separate 
ownership of lot and building is not uncommon. One man 
may own the building site and lease it for a long term of years 
to another man who erects a building upon it. In such a case 
the building becomes the property of the landowner at the 
expiration of the lease, unless the lease is renewed. In other 
cases the separation in ownership is permanent, the house- 
owner paying an annual sum to the landowner for the use 

296 



BENT 297 

of the ground. This is the case, for example, in Baltimore, 
where ground rents are an important feature in the economic 
Hfe of the city, and also in some northern cities of England, 
and in Scotland, where "feus," a form of perpetual ground 
rent, are a familiar institution. Let us remember, then, that 
in economic discussions, the word " rent " means only that 
which is paid for the use of land or other natural agents. Inas- 
much as land is the chief natural agent appropriated by man 
to his uses, it is common to speak of land as if it were the only 
natural agent for which rent is paid. It is therefore neces- 
sary to caution the student at this point that when the word 
" land " is used in the following pages, it will almost always 
be possible to substitute for it the more general term. In 
other words, the same forces which determine the rent of 
land determine in the main the rent of other natural agents. 
1. The Quality of the Land. — The first thing to be noted 
about land is its quality. Differences of fertility of agri- 
cultural land are known to every observer. They depend 
upon what one of the early economists described as the 
" natural and indestructible properties of the soil." In 
recent years many writers have objected to this statement. 
It has been said in denial that soil is not " indestructible " ; 
that it may be and often is exhausted; that it can be re- 
moved from the land altogether, and that on the other hand 
it can be created by fertilization, etc. The disagreement 
which these writers express is due in large part to their use 
of the word " soil " in its narrow sense. If we use the 
word " soil " only to distinguish the thin top layer of the 
land that contains certain chemical elements necessary to 
plant life, then some of the objections just stated are valid 
ones. Such " soil," as distinguished from subsoil and the 
ground lying underneath, may indeed be carted on or off the 
land at pleasure and may be wasted or replenished. But 



298 ELEMENTARY PRINCIPLES OF ECONOMICS 

even granting this, there still remain certain qualities of the 
land that are practically or entirely indestructible and un- 
producible, and which affect the productiveness of the land 
so directly that we may without impropriety speak of them 
as " properties of the soil." Such a property is the con- 
formation of the land. A steep gravelly hillside does not 
equal a plain in fertility, nor is the north side of a mountain 
as productive as the south side, other things being equal. 
Again, climate, although strictly speaking not a " property 
of the soil," is an inseparable condition of the land, upon 
which to a very great degree the productiveness of the land 
depends. It would be better to speak of these forces govern- 
ing the quality of the land as the inseparable conditioTis affect- 
ing its productiveness. Of these, extent (standing room), 
conformation, and climate are essentially natural and in- 
destructible. 

As we have just seen, under the " original and indestruc- 
tible qualities of the soil," or, to use the phrase suggested, 
the inseparable conditions affecting production, we must 
include the general physical environment, and this means 
much more than many modern critics have recognized. 
Concrete instances will aid us in appreciating the significance 
of this environment. In the western part of New York 
State, along the shores of Lake Erie, we find a region which is 
admirably adapted to the production of table grapes. This 
is due in part to the properties of the soil itself, but more 
particularly is it due to the presence of Lake Erie, which, by 
absorbing -the heat in the springtime, delays the appearance 
of vegetation, and by giving off heat in the fall retards the 
action of the frost, thus giving the grapes time to ripen. 
If we go to Palisade in the western part of Colorado, we 
find a region so admirably adapted to the production of 
peaches that some of the land was several years ago valued 



RENT 299 

at $1000 per acre. This is due, not merely to the properties 
of the soil, but also to the peculiar location of the region, 
which is of such a character that the breezes keep off the 
frost. Land thirty miles to the west, which is apparently 
similar in quality, will not produce peaches and is far less 
valuable. Careful consideration of actual agricultural con- 
ditions leads to the conclusion that, while man can do much 
to create fertility, it is a serious error not to attach great 
significance to the inseparable conditions affecting the pro- 
ductivity of the soil. Parallels to the American examples 
quoted could be found in different districts of England 
specially suited for the raising of particular crops or plants, 
or noted for the rearing of certain breeds of sheep or cattle ; 
and on any single farm the farmer will tell you that some land 
is good and that other land is bad, whatever may be done to 
deteriorate the one or to improve the other by niggardly or 
unskillful, or by generous and careful, cultivation, or by 
withholding or applying appropriate fertilizers. 

While it is true that the soil can be removed and that fer- 
tility can be increased or diminished, and consequently is not 
indestructible in a physical sense, we may speak even of fer- 
tility as economically perpetual, just as one modern econ- 
omist has called " capital value " perpetual. While the land 
yields an annual return, its fertility may be maintained and 
even increased by wise husbandry. It is only, then, by a 
wasteful and prodigal agriculture that the original gifts of 
nature in the fertility of the soil are exhausted. Similarly 
the value of the capital invested in a manufacturing plant is 
maintained under wise management, though the concrete 
capital forms are undergoing constant destruction. But, 
as it is easier to retain the fertility of the soil in perpetuity 
and to increase it than it is to maintain and increase the 
value of capital, land has in this particular a superiority. 



300 ELEMENTARY PRINCIPLES OF ECONOMICS 

Fertility, even when artificial, becomes essentially a part 
of the land. The farmer, when he invests his capital in fer- 
tilizers, makes a contribution which becomes indistinguish- 
able from the soil itself. From such a case, where capital is 
embodied in the land and assimilated to it, we pass by in- 
sensible gradations to fences, barns, houses, etc., which more 
and more retain their distinct character as capital that can 
be removed and can also be reproduced. Where, then, is the 
line between land and capital to be drawn? We might, to 
be sm-e, restrict the term " land " to strictly natural land, and 
apply the term " capital " to all products, including even 
the soils of old lands which have been kept productive by 
fertilization. But this distinction, while perhaps logical, 
would for practical purposes be confusing. On the other 
hand, if we include under land all capital that has been in- 
sensibly incorporated in it, we must acknowledge that there 
is no hard and fast line of division between land and capital. 
Here again we are reminded that in economics, as in daily 
life, distinctions are governed by convenience, and are good 
or bad according as they are more or less useful. 

The distinctions between land and capital are now under- 
going discussion and may be regarded as debatable ground in 
economics. We cannot enter into the controversy in this 
place or give all the reasons why it seems to us that the dif- 
ferences between land and capital are fundamental in their 
theoretical and practical significance. 

2. The Situation of the Land. — The second great fact 
to be noted about land is its situation. On one side this is 
closely connected with climate. Thus, the significance of 
situation near a large body of water or near a mountain range 
has already been pointed out. But the situation of land with 
regard to the consumers of products is of even greater signif- 
icance. Other things equal, land a hundred miles from mar- 



BENT 301 

ket is more valuable than land a thousand miles from market. 
This difference is really one of communication and trans- 
portation, and therefore, of accessibility, v/hich depends 
mainly upon distance. But land may be far away, yet easy 
to reach, or near, yet difficult of access. Changes in the cost 
of transportation therefore affect rents profoundly. Thus, 
the agricultural rents of England were revolutionized during 
the last century by cheap ocean transportation, by which 
distant lands were brought very near to her shores. 

To this fact of situation we must ascribe almost wholly 
the enormous rents paid for city lots, as contrasted with the 
rents paid for lots in suburban places or in small towns. 
Here, too, rapid and easy transport powerfully affects rents. 
Good means of rapid transit increase the value of suburban 
lots and check the rise of rents for residential sites in the 
cities themselves. 

And now, having noticed that all the minor economic 
differences in land resolve themselves into differences of 
quality or of situation, we may go one step farther and reduce 
these two differences, for the purpose of convenience, to one, 
viz., desirability. Suppose, for instance, that a man in 
New York City owns two farms, one in the state of Dakota, 
the other in his own state. If the Dakota farm produces 
thirty bushels of wheat to the acre, and it costs the price 
of ten bushels per acre to get the crop to market, while the 
New York farm raises twenty-two bushels per acre and it 
costs two bushels per acre to get the crop to market, the 
farms are equally productive as far as the owner is con- 
cerned. Other conditions being the same, the two pieces of 
land are equally desirable. In short, we may say that they 
are equally good land. Whenever we speak of good land, 
therefore, in connection with the subject of rent, we mean 
land which for all reasons taken together is desirable. It 



302 ELEMENTARY PRINCIPLES OF ECONOMICS 

will be absolutely necessary to keep this in mind in studying 
the following pages. 

Rent of AGRicuLTunAii Lajstd 

To-day there exist large areas of land in certain parts of 
the world which may be had for nothing. Of this land some 
is cultivated and yet pays no rent ; and some is not cultivated 
at all. Why, then, is it that some land will bear rent under 
such circumstances? Obviously, because that land is more 
desirable than the land which may be had for nothing. Let 
us illustrate this by a diagram. 



e"* 



_y /-> 



Suppose the above to represent all land, arranged in seven 
groups according to quality, each small parallelogram ^rep- 
resenting 2 dollars' worth of product based on its value 
at the farm. Then the first group will produce 14 dollars' 
worth of product as the result of a given outlay of labor and 
capital ; the second, 12 ; the others, 10, 8, 6, 4, and 2, re- 
spectively. Now, if the people are few in number and need 
a small part of the land alone, they may cultivate only A, or 
the most desirable land. As long as there is enough of this 
land, if it is of equal desirability, there will be no rent, for 
no man will pay rent for what he can obtain for nothing. 



RENT 303 

But the time may come, with increasing population, when 
more land is needed, and cultivation is driven down to B. 
Land is still free there, but all the land of group A has now 
been appropriated. If, then, any man insists upon cultivat- 
ing land which belongs to an owner in group A, he must pay 
for the privilege. How much must he pay ? Ricardo would 
say 2 dollars for the amount of land used to produce the 14 
dollars' worth of products, and, assuming, as Ricardo did, 
the cultivators to be of equal degree of efficiency, the rent 
would be 2 dollars, since in group A they can produce 14 
dollars' worth of product with a given outlay of labor and 
capital, while in group B they can produce only 12 dollars' 
worth. The land in B, which is free land, is now situated 
on what may be called the extensive margin of cultivation ; 
that is, the grade of land which will just pay for cultivation 
and no more. The normal reward of labor and capital in 
agriculture is the total return to farming on this margin. 
The surplus product from the superior land — in other words, 
the advantage which owners of land in A have over the tillers 
of the free land — is rent. And it is rent whether the owners 
of the land in A work the land themselves or lease it out to 
others. 

If population increases still further, without any improve- 
ments in the arts of production or of consumption, the margin 
of cultivation will in time descend to land in group C, where 
the value produced by a given amount of labor and capital 
is less than that produced before. Land in B will now 
return a rent of 2 dollars, while land in group A will yield a 
rent of 4 dollars. If the margin of cultivation is forced down 
later to E, then rents on land in B will equal one-half, and on 
land in A will equal four-sevenths, of the entire product of 
such land. 

Intensive Cultivation. — We have now considered rent 



304 ELEMENTARY PRINCIPLES OF ECONOMICS 

from the point of view of the extensive margin of cultiva- 
tion. This is the traditional treatment of the subject of 
rent which has been most emphasized by economists in the 
past. They have, however, not neglected to treat rent from 
the point of view of the intensive margin, which we shall now 
consider. 

With the figure in mind, let us place ourselves again at the 
point where all the A land is taken up and the men are begin- 
ning to seek new means of production. We have assumed 
that they will take up new land in group B. This is not the 
only possibility, however. It is probable that land in A may 
be made to produce more than it has yielded before, if the 
amount of labor and capital expended upon it is increased. 
In other words, it will be possible to cultivate the old land 
more intensively at a profit. Suppose that ten men formerly 
cultivated 100 acres of A land, raising 1400 dollars' worth 
of product, and that now eleven men put their labor upon 
the 100 acres. It may be that the 100 acres will now produce 
1530 dollars, in which case it is evident that the labor of 
the eleventh man has made a difference of 130 dollars. The 
1400 dollars' worth of product raised by the ten men meant 
140 dollars per man. In accordance with the law of diminish- 
ing returns, the eleventh man does not increase the output 
proportionately, but he is still producing 10 dollars more than 
he would if he were to work on the B land," where by our 
assumption ten men could produce only 1200 dollars' worth 
of products. The owner will give such a laborer only what 
he could -get elsewhere, on the B land, which would be 120 
dollars. The difference between the 120 dollars and the 130 
dollars the owner of the superior land takes for himself. 
Encouraged by this, the owner thinks of hiring a twelfth man, 
but concludes that he would thus secure a crop of only 1640 
bushels. Hence the twelfth man would increase the output 



BENT 305 

by only 110 doUars, while he would have to be paid 120 dol- 
lars, the amount that he could earn by working free land in 
group B. All new laborers, therefore, in excess of one for 
every ten of the earlier laborers, would find it more profit- 
able to put their labor upon the free land. Hence, as the 
demand for agricultural produce increases relatively to the 
supply, new labor and capital are expended upon land 
already under cultivation as well as upon land not used before. 
The rent of such land is increased by the surplus yielded 
by every addition of labor and capital. In other words, 
there is a change in both the intensive and extensive margins 
of cultivation. With every increase in the price of produce, 
and with every fall in the extensive margin of cultivation, 
more labor may be employed profitably on land already 
cultivated. Thus the landowner, who in the case last sup- 
posed could not afford to employ a twelfth laborer, may be 
able to employ thirteen or even more when the extensive 
margin of cultivation has fallen to group C or D. From the 
foregoing illustration it is clear that the theory of rent is 
based upon that law of diminishing returns which has 
already been explained in a previous chapter. It is evident 
that, barring improvements in the arts of production or con- 
sumption, each addition to the number of mouths which must 
be filled, at least beyond a limited number, makes the task 
of drawing sustenance from the earth more difficult. But 
we know that improvements have hitherto kept pace with 
increasing population, or have outstripped its growth, to use 
the more correct description. 

The intensive margin is reached in the case of all land when 
the last application of labor and capital produces no surplus. 
What is called the extensive margin means land which just 
pays for cultivation and yields no surplus beyond the re- 
muneration of labor and capital. When we treat the rent 



306 ELEMENTARY PRINCIPLES OF ECONOMICS 

of land from the point of view of the intensive margin, we 
have one uniform method which appHes to all land. 

Rent op Urban Land 

The fact that situation is the factor of special importance 
in determining the desirability of urban land leads to cer- 
tain results of a peculiar nature that call for separate discus- 
sion. We may consider first of all land used for residential 
purposes. Cities have quarters which natural beauty, health- 
fulness, convenience, and in an especial measure fashion 
have rendered particularly desirable. In proportion to de- 
mand the supply is sharply limited, and this circumstance 
causes a keen competition. The height to which this com- 
petition will carry rents will depend upon the number pos- 
sessing large amounts of wealth, and upon their readiness 
to spend their money on what they regard as desirable sites 
for homes, and fashion has perhaps in towns more influence 
on such intensity of desire than any other force. Similar 
considerations will affect the height to which the rent of 
business sites will rise. The higher the average of well- 
being and the more willing people are to spend their money, 
the greater will be such rents. Fashion enters here, too, 
particularly in the retail trade. If people spend money 
readily, they will pay appreciably more for an article in a 
convenient locality than for the same commodity in a situa- 
tion slightly less convenient. This will often enable those 
whose business is in desirable locations to secure higher prices 
with a larger quantity of sales, or to increase still further the 
number of sales by keeping to the price asked by competitors 
situated less desirably. Intensity of traffic is an important 
consideration in determining the rent, and consequently the 
value, of retail business property. We must also take into 



BENT 307 

account the quality of the people who are responsible for this 
traffic, the rent depending both on numbers and on quality. 
In some cases a high degree of intensity may counterbalance 
a lack of fashion, or even more than counterbalance it, and 
retaU business property in a neighborhood which is not 
fashionable may, in consequence of the intensity of traffic, 
have a higher rent than similar property in a fashionable 
locality where the traffic is comparatively small. The 
influence of fashion, however, can be seen in a very marked 
manner in a city like New York, where large numbers of 
rich people would on no account make purchases in an 
" unfashionable " street. The result is a large surplus 
gain secured by business sites favorably located. Competi- 
tion transfers to the landowners that surplus due to situa- 
tion. This explains a fact which has puzzled many observers, 
namely, the high rents in American as contrasted with Euro- 
pean cities. American cities are spacious, but other con- 
siderations besides space govern rents. 

Reflection will show that where the two elements of a high 
degree of scarcity and desirability enter into the location of 
land on the seacoast or in inland health or pleasure resorts, 
similar causes will produce large rents. On the other hand, 
it is commonly a matter of little or no concern where the 
potatoes and beef we eat are produced, and the result is 
that agricultural rents are governed less noticeably by sit- 
uation, the means and cost of transport being the chief 
consideration in this matter. 

The Relation of Rent to Value of F>roduct. — It is often 
said that rent has no influence on the value of the product, 
and that rent differs herein from wages and interest, which 
are said to " determine " price. This view at first sight seems 
to be paradoxical, as the tenant must pay rent to the land- 
owner as well as interest to the capitalist and wages to his 



308 ELEMENTARY PRINCIPLES OF ECONOMICS 

laborers. The paradox is explained by saying that prices 
are fixed by the expenses of production on the poorest land 
where wages and interest are paid, but no rent is possible, 
or by the expenses of production where marginal capital 
is employed on the better grades of land. Hence the rent 
that is paid for the better land is the result, and not a cause, 
of the price fixed in this way. 

This doctrine is true in the main, but it has its limitations. 
To the extent that land is " indestructible " and does not 
need any treatment to maintain its services to production, it 
is correct to say that rent does not enter into price. On 
the other hand, to the extent that labor and capital require 
a remuneration to keep them from perishing, wages and 
interest do clearly enter into price. But so far as regards 
the payments necessary to keep up the fertility of the land, 
and so far as regards the surplus above maintenance which 
labor and capital receive, the doctrine is not true. 

The Relation of Rent to the Value of Land. — The value of 
land, however, is determined by its rent. The value of the 
product determines rent, and rent in turn determines the 
value of the natural agent. If any piece of land is so much 
more desirable than the poorest piece which is in cultivation 
that it will return a rent of five dollars per year, and if at the 
same time and place capital regularly commands 5 per cent 
interest, then the owners of the land and others will regard 
each acre as equal in value to an amount of capital that 
returns five dollars per year, or one hundred dollars. But 
anticipated future changes in the yield of land are also 
reflected in the prices at which land is sold. If it is gen- 
erally expected that the yield of land will increase, its sell- 
ing price will be high as compared v/ith its present income ; 
if it is anticipated that the income of a particular piece 
of land will fall, its selling price will be relatively low. 



RENT 309 

Hence we may say that the value of land is its rent 
capitalized. 

Definitions of Rent. — We are now prepared to define 
rent more exactly and completely than was possible before, 
and to see that different definitions which may be given 
describe it in reality from different points of view. Thus 
the definition, " rent is that which is paid for the use of land 
or other natural agents," conveys no idea of the power by 
which it is secured nor of the way in which its amount is 
determined. In order that land of a given grade should have a 
rent paid for it, it must be both useful and scarce. The more 
useful grades of land are scarce, while the less useful grades 
are in excess of the demand for land and are no-rent lands. 
According to Ricardo, the author of the generally accepted 
theory of rent, the amount of rent is determined hy the extent 
to which the given natural agent or the given use of the agent 
surpasses in productiveness the poorest natural agent of the 
same sort or the least profitable use of such a natural agent that 
society requires to meet its demands for the product. In all this 
it has been assumed that cultivators possess and display 
equal efiiciency. That is, that a given piece of land will 
yield the same return per dollar's worth of labor and capital 
expended upon it, no matter which one of our 6,000,000 
farmers operates the farm. Differences of product due not 
to differences in the natural agent, but to differences in the 
ability of those who use the natural agent, make it difficult 
to state accurately the measure of rent but leave unmodified 
the general statement of the differential character of rent as 
presented by Ricardo. 

SUMMARY 

1. Rent is the return paid for the use of a natural agent, and is 
equal to that part of the product of the natural agent which 
is in excess of the product of the poorest agent of the same 



310 ELEMENTARY PRINCIPLES OF ECONOMICS 

sort that is cultivated, assuming equal applications of labor 
and capital. 

2. So long as land exists in excess of all demand, rent is determined 

by the excess of product over that of the poorest free land, 
assuming equal applications of labor and capital. 

3. When all land is talsen up, and all is cultivated that will repay 

cost, rent is determined by the excess of product over the 
necessities of laborers, — as determined by the law of wages, — 
and the necessary reward to the capital invested in cultiva- 
tion. 

4. Increased demand for the products of the soil regularly results 

in the cultivation of more land (extensive cultivation) and in 
the application of more labor and capital to that already in 
cultivation (intensive cultivation). 

5. In a given stage of the arts of production a point is reached 

in the application of economic energy to any natural agent, 
beyond which the return to further applications of energy 
is proportionately less (the Law of Diminishing Returns). 

6. Special importance attaches to situation in the determination 

of urban rents. 

7. The value of any natural agent tends to be determined by its rent 

capitalized at the current rate of interest on free capital, 
but falling and rising land values modify this tendency. 

QUESTIONS FOR RECITATION 

1. On what is rent based? Why would rent disappear if land 

were unlimited in amount and all were of equal quality? 

2. Discuss the differences in desirability of land. 

3. How is the amount of rent determined when free land exists ? 

4. What is the extensive margin of cultivation? The intensive? 

What is intensive cultivation? What considerations deter- 
mine how far intensive cultivation may profitably be carried? 
State the Law of Diminishing Returns. Show how it applies 
to land used for manufacturing. For commercial build- 
ings. For city residences. 

5. What effect does a lowering of the margin of eidtivation have 

upon rent ? Why ? 

6. What is the effect of improvements in the arts of production? 

Of consumption? Of transportation? What are the forces 
in society that tend to raise agricultural rents? Urban 
rents ? 

7. Does rent determine price? If so, why? If not, why not? 

8. How is the value of any natural agent measured? 



RENT 311 

QUESTIONS FOR STUDY AND DISCUSSION 

1. Discuss the different kinds of rents paid by farm tenants with 

which you are familiar and compare the advantages and dis- 
advantages : 

(a) to the land owners ; 

(6) to the tenants ; 

(c) to society at large. 

2. Under what cireumstancos is tenancy of land good, under what 

circumstances evil ? If generally an evil, -what would you do 
about it ? 

3. Supposing you are married, is it better for you to own your home 

or to pay rent ? Would home ownership be preferable for 
you, even if more costly ? 

4. Do high rents raise the price of agricultural products ? 

5. Enumerate the advantages of private ownership of land. What 

are the disadvantages ? Is it possible to increase the present 
social advantages and lessen the present disadvantages of 
landed property, while still retaining it ? 

LITERATURE 

Clark, J. B. : Distribution of Wealth, Ch. XIII, pp. 188-193. 
Commons, J. R. : The Distribution of Wealth, Ch. Ill, pp. 159-170. 
George, Henry : Progress and Poverty, Bk. Ill, Ch. II (seven pages). 
Hobson, J. A. : The Economics of Distribution, Ch. IV, §§1 and 2. 
King, W. I. : The Wealth and Income of the People of the United 

States, Ch. VII, pp. 154-163. 
Mill, J. S. : Principles of Political Economy, Bk. II, Ch. XII, §§ 2 

and 3. 
Patten, S. N. : Dynamic Economics, pp. 144-147. 
Taylor, H. C. : "The Differential Rent of Farm Land," Quarterly 

Journal of Economics, August, 1903. 
Walker, F. A. : Land and its Rent. 



CHAPTER III 
WAGES AND THE LABOR PROBLEM 

I. How Wages are Determined 

We have pointed out that of the factors of production, 
land and labor are the primary and original ones. Having 
discussed rent, or the portion of the product allotted to the 
owners of land, we may next properly consider wages, the 
portion allotted to labor. First of all, it is to be noted that 
in the study of wages there are really two distinct problems 
to be investigated. What share of the total produce of indus- 
try goes to labor f This is the problem of general wages. But 
having answered this question, we shall still have to ask our- 
selves why some classes of tvorkmen receive greater incomes than 
others; why brick laying, for instance, is paid a higher rate of 
wages than is hod carrying, and so on. This second problem 
is called the problem of relative wages. We shall discuss 
the two problems separately as we have here stated them. 

1. General Wages. — It follov/s from our discussion of the 
determination of value that if we imagine a purely hypo- 
thetical and practically impossible condition where wage- 
earners were in excess of all demand for their labor, such labor 
would have no value; wages would be nothing. On the 
other hand, if workers were few and in great demand, only 
the more intense wants for labor could be satisfied, and wages, 
or the value of labor, would be very high. It is evident, 
then, that wages, the value of labor, depend upon the rela- 

312 



WAGES AND THE LABOR PROBLEM 313 

tion between the supply of labor and the demand for it. 
But this statement is too general to be of great use. We 
must therefore consider further the forces that determine 
the supply and the demand. 

The Number of Wage-earners. — We have already dis- 
cussed the tendency of the human race to multiply. Beyond 
all doubt the desire for marriage and family is one of the 
strongest and most universal of human desires. But over 
against this desire stand many others, — desires for food, 
clothing, and a multitude of other things which are of course 
arranged and satisfied in order of their economic importance. 
No man intentionally satisfies weaker desires at the expense 
of stronger ones. In the whole list of desires, that for mar- 
riage must take its place according to its importance. The 
rank of this desire varies with individuals and classes. Some 
regard education, books, art, or even a substantial bank ac- 
count as more important than marriage in their scale of de- 
sires. The amount of necessaries, comforts, and luxuries which 
any person or class is accustomed to enjoy and to insist upon 
having, is the " standard of life,'' or the " standard of comfort," 
of that person or class. This standard of life, though inca- 
pable of precise definition, is a very real and powerful force in 
the determination of wages. Whenever wages tend to fall 
below the point at which the workman can maintain his 
standard of life for a family, many workmen will do without 
the family, and wdll attempt to maintain the standard of life 
for themselves alone. Especially since women have become 
independent wage-earners, with a standard based on their own 
earning power, has this force come to operate upon both men 
and women to prevent or postpone marriage, and to dimin- 
ish the number of children born. The higher the standard of 
life, the greater is the persistence shown in maintaining it. 
Those whose standard is very low are often heedless or hope- 



314 ELEMENTARY PRINCIPLES OF ECONOMICS 

less when that standard is threatened; while those who 
have attained a high standard display marked caution in 
delaying marriage until their income will justify such a course. 
It is plain, then, that the standard of life constantly limits the 
number of wage-earners, and hence tends to maintain or even 
to increase the value of labor. Notice, however, that it is 
not here claimed that the standard of life directly affects 
wages. Whether or how far the standard of living or of 
comfort can influence directly the wages of labor is quite a 
different question. 

The Economy of High Wages. — In what has just been 
said we have simply noted the influence of the standard of 
life upon the number of workers in the labor market. But 
the result is equally striking when we come to consider the 
influence of the standard upon the efficiency of labor. Even 
from the point of view of employers as a class, the policy of 
depressing the workers' standard of life stands condemned. 
Labor, to attain its highest efficiency, must have character 
and intelligence as well as mere brawn. More and more, 
business men are coming to learn the " economy of high 
wages," and to recognize that " cheap labor is dear labor." 
American labor is in many industries the cheapest labor in 
the world because it is the best paid. High wages make pos- 
sible a high standard of life. The high standard of life makes 
the labor intelligent, hopeful, and full of character, as well 
as more efficient physically. And the increased efficiency 
makes possible the higher wages. Thus by action and re- 
action the standard of life is both a cause and a result of the 
wages received. 

The Demand for Labor. — In what has gone before, we 
have considered especially some of the forces that operate 
to control the supply of labor in the labor market. In other 
words, we have been considering the problem of wages chiefly 



WAGES AND THE LABOR PROBLEM 315 

from the point of view of supply of labor. It remains for us 
to see how far we can explain wages from the point of view 
of demand. Manifestly, under our present industrial system, 
capital will not be saved nor businesses conducted 
unless those who save the capital and those who con- 
duct the businesses receive a reward for their contribution 
to production. If workmen in seeking higher wages enforce 
demands which would rob the capitalist of the interest that 
is his due, or the entrepreneur of the profits that secure his 
services, then shortly the capital will cease to be saved and 
the unprofitable businesses will be discontinued. It is evi- 
dent, therefore, that the demand for labor has an upper limit 
in the value to society of the product of labor. By unjust 
laws, by inequitable conditions, the employers may be able 
to secure labor for less than the workman contributes to the 
value of the product, but it is not easily conceivable that 
under present conditions of industry the labor can for long 
get more than it actually produces. 

Summary of Theory of General Wages. — Summing up 
now what has been explained at length, we may say that 
wages depend upon the relation hetiveen the supply of labor and 
the demand for it. The supply of labor, and hence the lower 
limit of wages, is fixed to some degree by the standard of life 
of the workers. But as this force operates slowly, it may 
in extreme cases happen that the only lower limit to wages is 
the amount which will enable the ivorkers to live. In earlier 
days some economists seemed to think that wages would 
normally and in the long run rest at this point of bare subsist- 
ence, and the law of wages which they formulated has there- 
fore been called, on account of its rigidity and its harshness, 
the " iron law of wages." On the side of demand, we can only 
say that there is an upper limit, fixed by the value of the loorker's 
contribution to the product, beyond which wages cannot nor- 



316 ELEMENTARY PRINCIPLES OF ECONOMICS 

mally go, since the demand for labor cannot be measured at 
a higher price than the price of what it produces. Conse- 
quently the demand for labor may result in giving to the 
worker in wages the whole of the product of industry after 
deducting rent and such minimum interest and profits as 
are fixed by laws to be explained later. Between the lower 
limit, set by the standard of subsistence, or by the standard 
of life, and the upper limit, set by the value of the worker's 
contribution to product, loacjes tvill fluctuate according to the 
relative bargaining strength of the tivo parties to the wage 
contract. 

2. Relative Wages. — Coming now to the problem of rela- 
tive wages, to the question why some classes of work are 
paid for at a higher rate than others, it is evident first of all 
that the pay of workmen in any class of employment depends 
upon the relation between the demand for such labor and the 
supply of such labor, and upon the relative bargaining 
strength of those in each group. Thus far the considerations 
already discussed bear upon relative wages as upon general 
wages. But in the discussion of relative wages, there are 
certain special considerations to be borne in mind. Differ- 
ences in relative wages are settled in the great majority of 
cases by past conditions. To understand them we must 
go back to a man's father or grandfather. Occupations 
where remuneration is high are usually so difficult to enter 
that few are able to surmount the difficulties. Thus 
peculiar and rare qualities may be required, or an expen- 
sive training, which few parents are at once able and willing 
to give. 

The poor are thus caught in a vicious circle. Their poverty 
results in crowding them into a restricted group of occupa- 
tions. Their crowding into these occupations so increases 
the product in those fields that the product has a low value 



WAGES AND THE LABOR PROBLEM 317 

as compared with the product of industries less crowded. 
The value of the product being thus reduced, wages are also 
kept down. And the low wages are in turn a cause of the lack 
of preparation of the following generation for a wide choice of 
employment. Thus poverty breeds poverty. 

While the various sorts of labor are almost infinite in num- 
ber, they are nevertheless susceptible of a fairly distinct clas- 
sification. These classes have commonly been called " non- 
competing groups." Perhaps the best naming of these is that 
made by Professor Giddings as follows : automatic manual, 
responsible manual, automatic mental, responsible mental. 
Between any two groups very little competition is at any 
given time possible. What competition there is, is almost a 
matter of generations, resulting largely from the action of 
parents in preparing their children for entering one or the 
other of the groups. 

Can society do anything to hasten the upward movement ? 
Obviously it is against the selfish class interest of the higher 
groups to make easier the entrance into their groups. This, 
and even more importantly, ignorance and heedlessness, 
have resulted in social hostility or indifference to proposals 
for improvement. But in recent years, increased sympathy 
and knowledge have led to various hopeful movements of 
reform, such as improvements in the educational system, vo- 
cational guidance, and the like. The movement is likely to 
go much further as the various social and economic classes 
gain in knowledge, imagination, and sympathy. 

The Influence of Public Schools. — A good system of 
public education continually increases the amount of freedom 
in the choice of occupations. Education gives greater knowl- 
edge regarding the advantages and requirements of different 
occupations at the same time that it puts its possessor in a 
position where he can more readily realize the one and meet 



318 ELEMENTARY PRINCIPLES OF ECONOMICS 

the other. It therefore tends to lessen the competition for 
the lowest grades of employment, thus raising the wages there ; 
while it tends to lower the wages in the higher grades by mak- 
ing the competition for such employment more keen. 

It is of course easy to exaggerate the influence of more 
" schooling " in preparing men for the various tasks of life. 
But, after all, it is very doubtful whether any other one 
agency of civilization has a greater influence than does the 
school in fitting the young of all classes for the industrial 
struggle that lies before them. This being so, it seems likely 
that society will move rapidly and far along this line in at- 
tempting to lessen such inequalities of economic situation 
among classes as are not proved to be due to differences of 
inherited natural capacity. What results might not be 
achieved to-day if society were to provide for compulsory, 
free, subsidized education of body and mind of all its sons and 
daughters up to the eighteenth year of their lives, such edu- 
cation being limited only by the ability of instructors and stu- 
dents to realize its possibilities ! 

Adam Smith enumerated the following five causes for dif- 
ferences of wages in different employments : first, their agree- 
ahleness or disagreeahleness ; second, the ease or difficulty of 
learning them; third, the regularity of employment; fourth, 
the need of trustworthiness in the workman ; fifth, the prob- 
ability of success. This summary of determining conditions 
assumes an unreal freedom of competition among workmen to 
secure the greatest net advantage from their employment. 
It nevertheless is suggestive and helpful in explaining actual 
differences in relative wages. It will be a good exercise for 
the student to apply to existing occupations Adam Smith's 
statement of the causes of differences of wages. 



WAGES AND THE LABOR PROBLEM 319 

II. Labor Organizations 

Wages have been shown to be largely dependent upon the 
relative bargaining strength of the workers as compared 
with that of entrepreneurs and others who contribute to the 
work of production. The same thing could be shown to be 
true also of the other conditions of employment which enter 
into the wage contract, such as working hours, intensity of 
work, etc. Such being the case, it is natural that under our 
modern wage system workmen have sought to increase their 
bargaining strength by every means in their power. One of 
the most evident means is that of uniting their strength in 
labor organizations. By such organization labor is enabled 
to substitute " collective bargaining " for the individual 
bargaining under which the workman is at a manifest and 
great disadvantage. Labor organizations, then, are more or 
less permanent combinations of workmen formed to increase 
their power of determining the conditions of employment. 

Labor a Unique Commodity. — For many reasons it is un- 
fortunate that labor must be regarded as a commodity at 
all. Generalizing is at once one of the greatest economies 
and one of the greatest dangers of the human mind. We 
could hardly think at all if we did not generalize ; but our 
thinking often has very vicious practical consequences be- 
cause of imperfect generalization. The mental process by 
which we include labor among commodities is a notable in- 
stance in point. Having generalized the idea of commodities 
to include labor, we forget the peculiarities of labor and make 
it the victim of practical conclusions that are false and vicious 
for that commodity, however true they may be for others. 

Labor cannot be separated from the body and spirit of the 
laborer. Where his work is, there must he be, in conditions 
and circumstances that may exalt or debase him. Again, 



320 ELEMENTARY PRINCIPLES OF ECONOMICS 

labor unsold is lost forever. It cannot be held for a favoring 
market. Its sale is always a forced sale. The worker en- 
dures, but to-day's work, if unsold, cannot be sold to-morrow. 
It would require too great space to show all the other practical 
differences that mark labor off from other commodities. 
The two that have been explained will suffice to prove that 
we cannot use any " general principle " of " equal treatment " 
to justify the same laws for labor as for other commodities. 
" There is no greater inequality than the equal treatment of 
unequals." 

Origin of Trade-unionism. — It is a debated question 
whether any trade-union grew directly out of one of the older 
gilds. In the eighteenth century, unionism seems to have 
started with the building and the tailoring trades, as the 
employers in such cases were small contractors against whom 
it was comparatively easy to combine. In the nineteenth 
century in England, the trade-union movement spread to the 
factories and the mines, and some of the strongest unions are 
made up of operatives in large factories, such as the textile 
mills ; but in the United States unionism has not effectively 
spread to the unskilled and semi-skilled workers in factories. 
This leaves great bodies of workmen who have no chance to 
bargain on equal terms with their employers. If men cannot 
look forward themselves to becoming employers, they are 
bound in time to see that their interest lies in locking arms, 
that thereby they may secure the strength of unity, and by 
collective action restore some approximation to the old 
equality in skill and bargaining power that marked contracts 
between master and man in the simple industry of earlier 
centuries. Thus the organization of labor becomes socially 
and economically necessary and inevitable. 

But we must not exaggerate the advantage of the em- 
ployer when faced with a conflict with his employees. The 



WAGES AND THE LABOR PROBLEM 321 

employer has often important contracts to fulfill and he may 
lose his all as a result of a strike, while the employees lose only 
wages for a short time. The extreme on this side is given 
when an employer is trembling on the verge of economic 
ruin, wiping out the savings of years ; and on the other hand 
stands a thoughtless, improvident wage-earner who con- 
templates a period of idleness with satisfaction. 

Three Forms of Organization. — Labor organizations may 
be divided into three classes, and as a matter of fact are so 
divided to-day in the United States and England. The trade- 
unions in the United States now allied in the American Feder- 
ation of Labor, and the "old" trade-unions of England, are 
primarily unions of skilled artisans of distinct crafts. Ac- 
cording to the old trade-union idea, each craft should be 
organized by itself. The Knights of Labor in the United 
States, at one time a powerful body, is an example of the 
second class. They aim to break down the barriers to com- 
mon action found in differences of occupation. Within re- 
cent years in all industrial nations a still " newer " unionism 
has developed, on lines of industry rather than of craft or trade, 
of which the United Mine Workers and the Brew^ery Workers 
of America and the new industrial unions in England are 
notable examples. The three forms are usually distin- 
guished by the names trade- or craft-unionism, lahor-unionism, 
and industrial-unionism. In the United States the latest 
phase is represented especially in the two rival organizations 
known as the Chicago and the Detroit " wings " of The 
Industrial Workers of the World. The American Federa- 
tion of Labor, moreover, which is based chiefly on craft-union- 
ism, also includes a considerable number of powerful indus- 
trial unions. 

Growth of Labor Organizations. — Estimates as to the 
numerical strength of labor organizations in the United States 



322 ELEMENTARY PRINCIPLES OF ECONOMICS 

vary considerably. The number, of course, varies from time 
to time. A period of prosperity for the organization is gen- 
erally followed by one of reaction. Reaction has always 
ended in a new advance, and thus far in the United States 
each new advance has carried the labor organizations farther 
forward than ever before. The American Federation of 
Labor, at its thirty-fourth annual convention in 1915, reported 
a dues-paying membership of 1,946,347. Secretary Morrison 
of the Federation reported in the same year that " unaffiliated 
unions recognized by the Federation," including various 
railway " Brotherhoods," had a membership of 344,182. 
If to these figures be added those of the probable membership 
of the Knights of Labor, Industrial Workers, and other 
smaller bodies, the total number of members of labor or- 
ganizations would probably rise to two and a half millions. 
Relative numbers of unionists are as great for other great 
industrial nations as for our own country. It was calculated 
in 1911 that there were over 11,000,000 unionists in twenty 
nations of the world. 

Strikes. — Strikes are essential to collective bargaining, 
as they are nothing else but the refusal of employees to agree 
to the terms of the employers. But, like the lockouts which 
are used by the employers, they produce obvious harm, both 
strife and loss, and therefore every effort should be made to 
avoid them, if the result can be secured by other means. It 
is only as a last resort that they can be justified, or are 
justified by the unions themselves. Yet the power of such 
action a"s a lever of advantage is not to be despised. 
Observation based on American experience goes to show that 
more than one-half of all strikes are wholly or partly success- 
ful in enforcing the demands of the unions. Out of a total 
of 36,759 strikes reported to the United States Bureau of 
Labor from 1881 to 1905, 47.94 per cent were wholly success- 



WAGES AND THE LABOR PROBLEM 323 

ful; 15.28 per cent partly successful; and 36.78 per cent 
failed. Even where strikes are apparently failures, they may 
accomplish much for the employees by inspiring suflScient 
fear of recurrence to bring about fairer treatment from un- 
willing and unjust employers. 

Strikes are most likely to be successful when they are 
declared during a period of improving business ; and hence 
strikes for higher wages are more often successful than those 
aimed to prevent a reduction. Indeed, it has been claimed 
that employers have in some cases secretly encouraged a 
strike when they have desired to close their works during a 
period of slack business, in order to drive a better bargain 
with the men when the strike should have proved unsuc- 
cessful. 

Boycotts and Injunctions. — Another effective weapon in 
the hands of organized workmen is the " boycott," which 
means a concerted refusal of workingmen of many trades, or 
even many localities, to purchase commodities produced in 
a shop where a labor dispute is in progress. The refusal 
to patronize often extends to business enterprises where no 
labor dispute exists at the time, but which buy from a boy- 
cotted establishment ; it is then called a " secondary boy- 
cott." The boycott is considered to be a more efficient 
means against the employer than even the strike. Of late, 
however, American trade-unions have used it less frequently 
than before as a result of the unfavorable attitude taken by 
the courts. The courts in America are a greater factor in 
deciding labor disputes than in any other country that has 
passed into the modern industrial stage. By issuing " writs 
of injunction " they often prohibit organized workingmen 
under the penalty of being punished for contempt of court, 
from performing collectively, acts in pursuit of a boycott 
or a strike, which, if done by an individual, would not have 



324 ELEMENTARY PRINCIPLES OF ECONOMICS 

constituted a breach of the law. EngHsh law grants much 
greater power to organized labor. 

Employers' Associations. — One of the results of the 
growth of labor organizations has been the growth of em- 
ployers' associations. Such associations have generally- 
arisen for the purpose of counteracting the increased bargain- 
ing power which the workingmen have acquired through their 
organization. Frequently, however, after a more or less 
lengthy period of industrial strife, the employers' associa- 
tions and the trade-unions have succeeded in arriving at 
agreements concerning wages, hours, and other working con- 
ditions. Such agreements, which are known as trade agree- 
ments, are generally valid during a period from one to three 
years. 

The Influence of the Public. — A powerful influence against 
violence and needless strikes is the recent great growth in 
public knowledge and public interest in matters that concern 
labor. Public support of their cause is now an object of fre- 
quent appeal by labor organizations. The use of " Union 
Labels," placed upon goods made by union labor under con- 
ditions satisfactory to the organizations, is becoming increas- 
ingly frequent and effective. 

The National Consumer's League represents a movement 
of the same sort from without the ranks of labor. This 
league, organized less than twenty years ago, is doing a quiet 
but effective work by granting the use of its " Consumers' 
League Label " to all manufacturers of certain classes of goods 
who satisfy the league that they are fulfilling prescribed con- 
ditions in the employment and treatment of labor. As yet 
the label is used only in a few classes of women's and children's 
clothing, but it is the intention of the league to carry its 
work much farther. The league has further accomplished a 
great work by initiating a country-wide movement for 



WAGES AND THE LABOR PROBLEM 325 

" early shopping," to lessen the overburdening of retail 
clerks in holiday seasons. 

The growing recognition by the public of its influence 
and responsibility in the matter of strikes and other phases 
of the labor problem is shown by the work of the United 
States Industrial Commission, which reported to Congress 
in 1900, and by the work of the Federal Industrial Relations 
Commission which reported in 1915 and 1916. Moreover, 
among various proposals for social action to lessen or pre- 
vent strikes, the one that meets with widest acceptance is 
that, in case of strikes, the public should be furnished with 
all the facts on both sides of the controversy. 

The National Civic Federation, an association of citizens of 
national prominence, with subordinate state federations in 
many states, has done much to organize public opinion effec- 
tively for fair decisions and hence for influence in many in- 
dustrial questions. 

Incidental Benefits of Labor Organizations. — 1. Promo- 
tion of Temperance. — The drinking of liquor is not allowed 
at union meetings, and most of the unions advocate tem- 
perance, although the majority of their journals stand against 
prohibition. The Brotherhood of Railway Engineers, how- 
ever, and some of the unions of highly skilled workmen are 
also in favor of prohibition. 

2. Educational Influence. — It would be hard to overesti- 
mate the importance of the educational feature of labor 
organizations. The debates and discussions which the 
unions foster stimulate the intellect and do much to counter- 
act the deadening effect of a widely extended division of 
labor. Moreover, they furnish opportunities for social cul- 
ture to women as well as to men, and thus lessen the tempta- 
tion to coarse indulgence and develop the finer side of their 
nature. 



326 ELEMENTARY PRINCIPLES OF ECONOMICS 

3. Elevation of the Standard of Life. — It is often ob- 
jected that they seek by imposing hindrances on some of their 
members to raise the wages of the rest. What they are really 
trying to do is to raise the workman's standard of hfe, in order 
that progress may mean for them not merely an increase in 
the number of men employed, but rather a betterment of 
the quality of human life concerned in the occupation. It is 
objected again that the limitation of numbers in one trade 
can only result in overcrowding others, and that therefore, 
if all trades were successfully organized, the results in one 
part of the labor field would neutralize the results else- 
where, and nothing would be gained. But such an objec- 
tion overlooks the significant fact that the union may 
check the imprudence that leads to overpopulation, and 
possibly maintain a just balance between the need of society 
for the labor and the need of the laborer for a complete 
human life. 

4. Many of the trade-unions perform also the function of a 
benefit society. They provide relief in case of death, acci- 
dent, sickness, unemployment, and in some cases even 
for old age. As a cooperative insurance company the trade- 
union is able to attain a high degree of efficiency, as the 
members, being bound by reciprocal ties of solidarity, for- 
bear to practice against the common insurance fund those 
small frauds which constitute such a grave problem in the 
administration of industrial insurance either by the state or 
by a private company. In Great Britain, the trade-union 
insurance fund forms an important element in the recently 
enacted system of social insurance. 

"Weaknesses of Labor Organizations. — Some of the weak- 
nesses of labor organizations have already been touched upon. 
These and other weaknesses, may be briefly summarized as 
follows : — 



WAGES AND THE LABOR PROBLEM 327 

1. Limitation of their Benefits. — They have often, particu- 
larly in their early history, sought to gain benefits by a 
selfish and exclusive policy toward other laborers. In some 
cases, they have been able to build up an evil labor monopoly. 
It must be admitted, on the other hand, that there is some- 
times, even in these days, valid excuse for limiting numbers. 
Unscrupulous employers have at times sought to increase 
unduly the number in a single occupation in order to have 
a reserve force of unemployed from which to draw in case of 
need and thus to keep down wages. 

2. Restrictive Policies. — As a whole, the trade-unions 
have been too inclined to oppose improved methods and pro- 
cesses, and have adopted various policies as a defense against 
them. One cannot fail to sympathize with their objections 
to the introduction of improvements of machinery and or- 
ganization if this introduction be made without consideration 
for the worker's welfare and be injurious to him, if only for 
the time being. Even if improvements of this kind do bene- 
fit wage-earners in the long run, it must be remembered, that, 
as has been said, the individual life is only a short run, and 
every means should be used to reduce to a minimum the suf- 
fering of the individual due to social progress as a whole. 
Also, the workers are warranted in their opposition to the 
inhuman speeding-up processes introduced by certain employ- 
ers. On the other hand, some of their policies unnecessarily 
hamper the employer ; for example, the undue limitation of 
output and of the number of apprentices. In opposing me- 
chanical improvements, not because they were detrimental 
to the health of the workman, but because he had no share in 
the profits, their policy has sometimes been shortsighted. 
They have failed to recognize clearly that the satisfaction 
of the increasing wants of the masses depends largely upon 
increasing production and efficiency ; that the greater out- 



328 ELEMENTARY PRINCIPLES OF ECONOMICS 

put due to improvement is directly beneficial to the work- 
man himself, as representative of the masses. Neces- 
sarily, the unions devote themselves mainly to policies 
which fall within the general field of distribution (working 
conditions, wages, etc.), and in this field they have been 
successful, but their policies must be judged with reference 
to production as well. In many parts of the world vast 
numbers of human beings still do not have enough to eat, 
and a very little added to average incomes means a very 
large increase in production. 

That it is not impossible to strike a satisfactory balance 
between the interests of the workers and industrial im- 
provement is shown by the case of the printing industry, 
where the union accepted the introduction of the linotype 
upon the condition that only skilled printers should be 
charged with its operation. 

3. Narrow and Shortsighted Views, — It has been one of 
the weaknesses of labor organizations in general that they 
have not been sufiiciently interested in public measures and 
reforms designed to benefit society. For example, they have 
given too little attention to sanitary matters and too little 
support to public health authorities in efforts to benefit the 
poorer classes. They have underestimated the importance 
of purity in politics and a highly trained civil service. At 
times they have favored measures which were bound to be 
ultimately injurious to them, simply because such measures 
would increase temporarily the supply of work. 

4. Laek of Flexibility. — Labor organizations have shown 
another weakness which is common to all great political and 
social organizations. Here red tape is necessary. General 
rules must for the most part govern, and individual inter- 
est must often be sacrificed or injured in seeking the welfare 
of the whole. 



WAGES AND THE LABOR PROBLEM 329 

III. Methods of Wage Payment 

Labor organizations strive to secure higher wages and 
better conditions of employment for workingmen than they 
would otherwise obtain, and thus to increase their share of 
the product of industry. But both by private employers and 
by economists other methods of wage payment have been 
considered besides the usual system of time wages, where the 
laborer is paid a fixed sum for each unit of time employed. 
Some of these methods call for discussion. 

1. Piecework Wages. — Under this system, the laborer 
is paid by the unit of product, instead of by the unit of time. 
The system of piece wages can only have a fair trial in indus- 
tries which allow considerable division of labor among occu- 
pations that are of a routine nature. Thus compositors in a 
printing ofiice may be paid by the thousand ems of type set. 
Payment by the piece, where possible, has certain evident ad- 
vantages both for laborer and employer, and has met with 
favor among certain trade-unions. But in some industries 
abuses of the system have been so many and so flagrant as 
to arouse active opposition. It has at times been used by 
unscrupulous employers to break down regulations and even 
laws limiting the hours of work, and more frequently still to 
bring about a reduction of wages. Thus, after the workers 
have attained a high rate of speed by straining every nerve 
and muscle to earn high wages, the price per piece is " nib- 
bled " in such a way that the workmen can earn by their in- 
creased exertion little if any more than they were earning 
before the piecework system was introduced. 

2. The Sliding Scale. — The system known as the " slid- 
ing scale," by which wages are made to depend upon the 
price of the product, has been adopted frequently among iron 
and steel workers and coal miners in the United States and 



330 ELEMENTARY PRINCIPLES OF ECONOMICS 

England. In recent years complaints have been made that 
employers under this system do not always truthfully declare 
the price of product, or their sales, and other difficulties have 
appeared which cannot well be explained here. 

3. Profit Sharing. — Under a system of profit sharing the 
workmen in any factory, or at least a part of them, are 
allowed to share in the profits of the concern. A stated 
wage is paid, and then, at regular intervals, a part of the 
profits of the business is divided among the employees. 
There are many differences of detail which do not concern us 
here. Advocates of the system point out that it (a) pro- 
motes economical use of material and machinery by employees, 
(6) generally increases their zeal and efficiency, and hence 
results in (c) a larger total product and a {d) larger income 
for the loage-receiwrs. Its weakness is that it is not expedi- 
ent to make the workmen bear the losses as well as participate 
in the gains, while the system without such a provision is 
likely to come to grief. Profit sharing has sometimes been 
extended to include capital sharing; that is, part ownership 
of the capital by the workmen, with some participation in the 
management. In recent years, profit sharing has been taken 
up with renewed interest and enthusiasm after an interval 
in which earlier hopes had given way to discouragement. 

4. The Task and Bonus System. — In the opinion of its 
advocates " Scientific Management," an American thought- 
product of our own day, promises a conservative revolu- 
tion in industry. Its claims are such as to challenge the 
study and fair consideration of every one who " loves 
his fellow man." Unfortunately we cannot discuss or even 
explain the system here. It must suffice to note these 
salient features. Scientific Management, as its name im- 
plies, proposes to apply to the management of industry the 
method of science, — wide and minute observation, analy- 



WAGES AND THE LABOR PROBLEM 331 

sis, classification and organization, etc. Every industry 
as a whole, and every process within every industry, is to be 
analyzed into its simplest parts. Every unnecessary move- 
ment or process is to be eliminated. Coordination of pro- 
cesses and parts and functions is to be perfected, to secure 
maximum economy of effort. The thinking and planning 
are to be done entirely by specialized and expert thinkers and 
planners. The worker on any machine or hand work is to 
be freed from all need of planning. For his task day by day, 
determined by scientific principles, a standard wage is to be 
determined, also on scientific principles. If the worker does 
the work in the time assigned, he is to receive the bonus, 
which raises his time rate very considerably above the usual 
time rate of the industry. This " task and bonus " system 
is in general regarded as a part of the system of scientific 
management. The entire system, including the wage feature, 
is suspected or decried by leaders of the working classes, 
for reasons which we cannot here discuss. But we must 
repeat that the potentialities of the system, for good and for 
harm, are such that every public-minded student should give 
the whole matter careful consideration. 

5. Cooperation, — If industry, as ordinarily organized 
in our great mercantile and manufacturing establishments, 
may be likened to a form of despotism, an establishment in 
which workmen are permitted to participate in capital owner- 
ship and management, under the chief control of one who is 
recognized as an industrial superior, may in the same way 
be likened to a constitutional monarchy. And finally, as 
opposed both to industrial despotism and to industrial mon- 
archy, we have the third form, industrial democracy. In- 
dustrial democracy means self-rule, self-control, self-direc- 
tion, by the workmen in their efforts to gain a livelihood. 
This is achieved in pure cooperation. 



332 ELEMENTARY PRINCIPLES OF ECONOMICS 

Under this system the workmen combine their own capital, 
purchase their own plant, and manage their own industrial 
affairs, in their own way, at their own risk, sharing profit 
or loss as the case may be. At least this is the method of 
productive cooperation. Distributive cooperation, on the 
other hand, is a system of cooperation in wholesale or 
retail trading. Distribution is here used not in the sense 
in which it is ordinarily used in economics, but in the 
sense in which we speak of the merchant's business as 
distributive. 

In distributive cooperation, which has been more widely 
successful than other forms, the consumers of finished goods 
combine to purchase what they need, and thus save middle- 
men's profits. They form a regular stock company, sub- 
scribe for shares, employ a manager and clerks, — who 
often do not even share in profits, — and start a business. 
Profits are sometimes divided only on the shares, -but the 
approved way is to pay a moderate interest on the capital 
and then divide profits between the two classes of stock- 
holders and customers. In such cases the customers share 
in proportion to their purchases, the division being made 
at stated intervals. 

In England and Scotland distributive cooperation has met 
with very great success. Productive cooperation, on the 
other hand, has disappointed the expectations of its earlier 
advocates. France seems to have had better success than 
England in productive cooperation. In the United States 
some instances of success are recorded, and many more un- 
dertakings of the sort have been partly successful. In Eng- 
land and Scotland Wholesale Societies have been formed for 
distributive cooperation, thus furnishing at the same time a 
steady market for some important productive cooperative 
concerns which they have organized. 



WAGES AND THE LABOR PROBLEM 333 

The Strength and Weakness of Cooperation. — Producers' 
cooperation (1) prevents strikes by completely identifying 
the interests of labor and capital. It (2) stimulates energy 
and (3) promotes economy and thrift, since self-interest, 
which usually animates only the employer, here animates 
all the cooperators. No slighting of work can be tolerated 
and, eye service vanishing, (4) much labor of supervision 
is saved. Best of all, there is (5) constant education of the 
cooperators in discipline and business detail. 

On the other hand, to speak of the weaknesses of the sys- 
tem, (1) (iimc^ec? cowTi^eZ^ often render the movement of such a 
business clumsy and slow. Action cannot be so quick and 
decisive as when one man acts on his own responsibility. 
(2) It has been hard for workmen to recognize the necessity 
of securing expert talent for the work of supervision and or- 
ganization. Failure has often been due (3) to moral defects 
on the part of the workmen. (4) Where success has at- 
tended the first steps of such a movement, the very pros- 
perity has sometimes produced dissension and disintegration. 
These weaknesses, in less degree, have appeared in consumers' 
cooperation. (5) Where success has been permanent, there 
has been a tendency to change from- cooperation to "joint 
stocMsm." 

Arbitration and Conciliation. — We cannot dismiss this 
subject of the relation of the laborer to the product of his 
labor without a few words regarding the part that arbitration 
and conciliation have played and are to-day playing in the 
strife of interests by which the social income is portioned 
out. Conciliation is a term applied to the regular efforts 
made by representatives of employer and employed or by a third 
person to prevent differences from arising, to heal such differences 
before matters reach an acute state, or, in the event of a strike, to 
secure a settlement without the intervention or adjudication of 



334 ELEMENTARY PRINCIPLES OF ECONOMICS 

outsiders. Arbitration, on the other hand, means an attempt 
to adjust matters by the judgment of those outside the dispute, 
and usually only after acute trouble has arisen. As is evident, 
conciliation is preferable, wherever and whenever it is 
possible. 

Both conciliation and arbitration have accomplished much 
for the preservation of industrial peace wherever thoroughly 
and honestly tried. Sometimes boards are appointed by 
employers and employed, and sometimes such boards are 
appointed by public authority. 

Until near the close of the nineteenth century, arbitration, 
even when public authorities provided boards, had always been 
voluntary. That is, the findings of arbitration boards were 
legally binding upon neither employers nor employees, and 
therefore gained their strength from the awakening of the 
public interest and the enlightening of the public mind as 
to the merits of the dispute. Indeed, it came to be a settled 
conclusion in the minds of economists and others that com- 
pulsory arbitration could not be successfully attempted by 
government. But for about twenty years now compulsory 
conciliation and arbitration have been given a trial on a con- 
siderable scale in New Zealand and Australia, the successors 
of the United States as laboratories of social experiment. 

Opinions, even of the most fair-minded and painstaking 
investigators, differ as to the success of the experiment. 
For several years the experiment was rather disparaged than 
opposed, when it was not enthusiastically praised. Unpreju- 
diced observers generally agree that the plan on the whole 
has worked well, but many of them express distrust of the 
long-time result, and also point out that results in Australasia, 
even if satisfactory, would not be conclusive for the greater 
industrial nations. In recent years, adverse criticism has 
gone to greater, sometimes to extreme, lengths, especially in 



WAGES AND THE LABOR PROBLEM 335 

the writings of a few American critics. On the other hand, 
there are still many who maintain stoutly that Australasia 
has really discovered a helpful method of promoting indus- 
trial peace. But it can never be more than one among many 
methods of dealing with this problem. Thoughtful people 
in New Zealand often say that one of the merits of compulsory 
arbitration, with all its weaknesses and failures, is that it 
recognizes the public interest in industry, because it is based 
on the hypothesis that society at large, as well as employers 
and employees, has an interest in the continuous operation of 
the industries ; and they hope for still greater improvements 
in adjusting industrial disputes. The question may be re- 
garded as still open. 

Labor and Factory Legislation and Lispection. — Labor 
and factory legislation and inspection also need a few words 
of comment in this connection, although the subject has been 
more fully treated in the chapters on the Industrial Stage in 
England and in the United States. Labor laws, honestly 
conceived and properly enforced, have been productive of 
incalculable good. Federal and uniform state legislation 
should be designed to keep children away from regular fac- 
tory work and in the school ; it should restrict to the utmost 
the employment of women ; it should limit the hours of em- 
ployment for different classes of workpeople, particularly 
for women, young persons, and children, to the length of day 
prescribed by medical experience, and should secure regular 
and convenient hours of leisure, such as are afforded by a 
Saturday half holiday ; it should compel employers to fence 
in dangerous machinery and otherwise guard against pre- 
ventable accident ; by compulsory insurance or workmen's 
compensation acts it should render employers pecuniarily 
responsible for accidents to employees ; it should minimize 
unemployment and casual employment; it should provide 



336 ELEMENTARY PRINCIPLES OF ECONOMICS 

for sickness insurance and for old-age pensions. No country 
has ever suffered in international competition by approxi- 
mation to the goal here described. Germany, which has 
done more than any other of the leading nations along these 
lines, has also made the most rapid industrial advance. 

SUMMARY 

1. General wages are determined by bargaining, between limits 

fixed on the one side by the product of the labor, and on the 
other by the cost of subsistence, as modified by the standard 
of living. The precise wage is determined by the relative 
strength of the two sides to the bargain. 

2. Differences in relative wages are due to special conditions affect- 

ing difiierent employments. 

3. Labor organizations, a natural development of modern in- 

dustry, have improved the status of labor. 

4. Against labor-unions it is charged that they are often short- 

sighted and ultra-conservative, and are forgetful of broad 
social interests. 

5. Piecework wages, the sliding scale, profit sharing, the task and 

bonus system, are various methods of wage payment that 
have been tried in recent times. 

6. Arbitration and conciliation are playing an increasing part in 

the settlement of labor disputes. 

7. Society, through legislation and otherwise, can do and should 

do much more than it has yet done in improving the condition 
of the "working classes." 

QUESTIONS FOR RECITATION 

1. In what ways does the standard of living affect general wages? 

Relative wages? 

2. Name the circumstances producing differences in relative wages. 

What is the "Iron Law of Wages"? 

3. Name- the different " noncompeting " groups of laborers. 

Classify some well-known occupations according to this 
grouping. 

4. What three types of labor organization are there? Discuss th'" 

change in the public attitude toward unions. 

5. What are strikes? What are their chances of success? 

6. Discuss the different systems of wage payment; their advan- 

tages and disadvantages, and their success. 



WAGES AND THE LABOR PROBLEM 337 

7. Distinguish between arbitration and conciliation. What is the 

present status of the question of compulsory arbitration ? 

8. What are some of the objects that should be obtained through 

labor legislation? 

QUESTIONS FOR STUDY AND DISCUSSION 

1. Is an explanation of why ditch diggers get low wages a justi- 

fication of the social and economic conditions that explain 
the low wages ? 

2. What would be the earnings of lawyers or physicians if aU men 

and women had equal opportunity to develop knowledge 
and sMU in those professions? Is an hour's work of a 
physician "naturally" more valuable than an hour's work 
of a ditch digger, or is the difference in value due to the 
difference in the supply of the two sorts of service ? Why the 
difference in supply? 

3. What is the economic effect of industrial education? WiU 

it change the relative supply of skilled as compared with 
unskilled labor? Will it change the relation as between 
manual work and professional services? 

4. How has Germany's social legislation increased Germany's 

indjistrial efficiency ? Is there any stronger reason for social 
legislation than the reason that it "pays"? What is the 
goal of social economic Ufe? 

5. How many states have passed compulsory insurance or work- 

men's compensation acts? What is the date of the passage 
of the first one in the United States ? 

6. How much does the United States pay annually in war pen- 

sions? Who receive the pensions? What would old-age 
pensions on the EngUsh scale cost in this country? How 
far would the recipients be the same as those now receiving 
war pensions ? 

7. Compare the merits of compulsory investigation and com- 

pulsory arbitration in labor disputes. 

8. Ought unions to be required by law to incorporate? 

9. What is a boycott ? a black list ? What is sweating ? parasitic 

industry? 

LITERATURE 

The literature of labor in the United States is so voluminous 
that any brief selection is unusually difficult and embarrassing. 
The attempt is made here to give at least one good title for each 
important topic. 



338 ELEMENTARY PRINCIPLES OF ECONOMICS 

Adams and Sumner : Labor Problems. 

Ashley, W. J. : The Adjustment of Wages. (Excellent reference for 
joint agreements, the sliding scale, and the tendency of em- 
ployers and employees to organization.) 

Carleton, F. T. : History and Problems of Organized Labor. 

Clark, L. D. : The Law of the Employment of Labor. 

Commons and Andrews : Principles of Labor Legislation. 

Ely, R. T. : Studies in the Evolution of Industrial Society, Bk. II, 
Ch. X. 

Fay, C. F. : Cooperation at Home and Abroad. 

Oilman, N. P. : Profit-sharing. 

Groat, G. G. : An Introduction to the Study of Organized Labor in 
America. 

Hoxie, R. J. : Scientific Management and Labor. 

Le Rossignol, J. E. : State Socialism in New Zealand. 

Lowell, Josephine Shaw : Industrial Arbitration and Conciliation. 

Moore, H. L. : Laivs of Wages. 

Nearing, Scott : Wages in the United States. 

Reeves, W. P. : State Experiments in Australia and New Zealand. 

Report of the Industrial Commission (U. S.), 1900-1901; also 
Reports of the Federal Industrial Relations Commission, 1915- 
1916. 

Schloss, D. P. : Methods of Industrial Remuneration. 

Sehoenhof, J. : The Economy of High Wages. 

Siegfried, Andre : Democracy in New Zealand. 

Smith, Adam : Wealth of Nations, Bk. I, Ch. I. 

Stimson, F. J. : Handbook to the Labor Law of the United States. 

Taylor, F. W. : Principles of Scientific Management. 

Webb, Sidney and Beatrice : The Case for the Factory Acts. Indus- 
trial Democracy, Pt. II, Ch. I, pp. 49-50; and A History of 
Trade-unionism. 



CHAPTER IV 
INTEREST 

Aftek our long excursion into the subject of labor and its 
reward, it may be well for us to pause a moment and place 
in the right connection what is to follow. It should be re- 
called that under the general subject of distribution, or the 
division of the social income among the factors that have 
worked to produce it, we have now discussed the subject of 
rent, the share received by the owners of land, and wages, 
the share received by labor. We come now in regular order 
to a discussion of the share apportioned to the owners of 
capital. Land and labor, in their broadest sense, are the 
only original elements in production. Of course, as has been 
explained, land includes not only building lots and. farming 
land, but also mines and rivers and fisheries, and, in short, 
all natural and unproduced agencies of production other than 
labor. Capital, on the other hand, is not a primary or 
original factor, but a secondary or derived one. 

Unlike land, capital is produced, but it is produced for 
the purpose of further production. In fact, we may define 
capital as the 'produced instruments of production. 

How Interest is Determined. — Interest is the return to 
capital. By what law is its amount determined? This 
question has been continually discussed and still appears to 
many economists an unsettled problem. The ancients in 
general denied that interest rested on any justifiable founda- 
tion. Aristotle thought it unjust, and Cicero classes it with 

339 



340 ELEMENTARY PRINCIPLES OF ECONOMICS 

murder. Throughout the Middle Ages it was condemned 
by the Church and prohibited by statute. One of the main 
reasons for this attitude is found in the fact that until recent 
centuries Httle capital was lent for productive purposes. 
Loans were usually made for personal consumption and for 
the relief of the distressed. The lender could not have used 
productively the amount lent, and the borrower did not 
desire the loan for productive uses. Despite public opinion 
and the law, however, the taking of interest continued cus- 
tomary wherever commerce was developed, and with the 
industrial awakening in the modern period of capitalism it 
was, of course, allowed as a necessity. 

Being allowed, it must needs be justified, and the explana- 
tions and justifications have been numerous and various. 
Earlier economists explained the laws of rent and wages, and 
then naively concluded that capital had what was left. 
The owner of capital was thus made the " residual claimant " 
in distribution. Others have thought that capital and land 
receive returns according to fixed laws, and that labor is the 
residual claimant. The truth seems to be that no one of the 
three is a residual claimant, but that each receives a return 
determined by regular laws. What, then, shall we say is the 
special law by which interest is determined? In answering 
this question, we shall try to make a statement of the case 
which shall reconcile conflicting theories, at the same time 
that we indicate briefly what those theories are. 

Fallacious Views Regarding Interest, — To begin with, let 
us clear the ground by ridding the mind of certain views as to 
interest that are very widely held and that stand squarely 
across the path leading to just and clear views on the subject. 

There is a very widespread opinion that the payment of 
interest to individual owners of capital is necessary to any 
accumulation of capital. This is clearly not so. If society 



INTEREST 341 

were to take over and manage all industry or the greater 
part of industry, it could create and maintain the needed 
capital out of the product of the industry. Society as a whole 
would in that case postpone possible present satisfactions for 
the purpose of easier and richer satisfactions from the result- 
ing capitalistic production. It may well be that we do better 
to leave the accumulation of capital to the self-interest of 
individuals, but we have no right to think or to assert that 
capital can be secured in no other way. • 

Another fallacy, perhaps as widely held, and even more 
obstructive to just views of capital and interest, is the idea 
that interest is fundamentally an amount of money annually 
paid for the use of some larger amount of money. Of course, 
on the surface this seems to be true; otherwise, the idea 
would never have gained credence. But a little reflection 
will show the fallacy and the harm in the fallacy. In the 
first place, it will be found that actual money is rarely lent, 
borrowed, or repaid. What is transferred, is control of 
wealth, — some form of purchasing power. As has been 
explained in an earlier chapter, a business man goes to his 
bank and sells his note, secured or unsecured, in exchange for 
a deposit. Against this deposit he draws checks at need to 
purchase needed goods, and especially capital in various 
forms. The bank pays out little gold or silver. In so far 
as it cannot balance checks against checks and so avoid pay- 
ment, it pays out various forms of notes which are themselves 
merely credit instruments. Thus it is clear that when men 
borrow, they do not usually or really borrow money at all, 
but only purchasing power. 

But again, such purchasing power, as the name implies, 
is not the real purpose or end of the borrowing. Nearly all 
borrowing has as its end the securing of capital, — real, 
physical, capital goods, to be used in the work of produe- 



342 ELEMENTARY PRINCIPLES OF ECONOMICS 

tion. If it were just as convenient to supply the capital 
goods in the first instance, the business man would rather 
have it so. And if capital could be so lent and borrowed, 
men could not have fallen into certain of their present wrong 
views of interest. 

Probably nine persons out of ten, perhaps ninety-nine 
persons out of every hundred, believe that the rate of interest 
depends upon the amount of money. We have already 
given one way by which this fallacy ma}^ be detected, but 
experience gives sufficient warning that further explanation 
is required. And here again explanation may perhaps best 
take the form of illustration. 

Assume a society with a given quantity of circulation 
medium, — and with a given quantity of capital goods. In 
this society John Doe is thinking of buying a cow for his 
dairy. At the actual level of prices he calculates how much 
he must pay for " keeping " the cow, including the feed, 
dairyman's wages, etc., and how much the milk and other 
products will bring in the market, at the existing price level. 
If, allowing for risk, depreciation, etc., he calculates that 
the products year by year will sell for %3 more than " cost 
of keep," he can, on a 6 per cent basis, afford to pay S50 
for the cow. ■ And if the current interest rate is 6 per cent, 
$50 will be the normal value of the cow. 

Now assume that this quantity of money is doubled, and 
that, in accordance with the quantity theory of money, 
prices are doubled, what will be the result ? Doe now cal- 
culates as before, but with all prices doubled, — prices of 
feed, labor, etc., on the one side, and of milk, cream, butter, 
etc., on the other. And by the same calculation as be- 
fore, he finds now a surplus of $6. Clearly then he can 
now afford to pay $6 a year for the amount of purchasing 
power required to secure his possession of the cow. But 



INTEREST 343 

the rate of interest will remain unchanged, both because 
he can now get SI 00 of purchasing power as easily as he 
could before get $50 of such power, and because the price 
of the cow has now doubled with other prices, and stands 
at $100. And $6 is 6 per cent of $100, just as $3 is 6 per 
cent of $50. 

If now we have succeeded in banishing forever from the 
mind of the student the fallacy that the interest rate is a 
function of the amount of money, we may go on to explain 
how interest really is determined. 

Demand and Supply. — In the first place, it is probable 
that all economists would agree that interest, which expresses 
the annual value of the use of capital, is determined, as is 
all value, by the relation between the demand for capital 
goods and the supply of them. Where there is a strong 
demand for a limited supply of such goods, the marginal 
utility of the capital will be high, and the capitalist can exact 
a large return in the form of interest. If the demand for 
capital be slight relatively to the supply, then the rate of 
interest will be low. Manifestly, however, this does not 
carry us far upon our way. We proceed to inquire what it is 
that determines the demand and supply. 

The Productivity Theory. — Investigation of the demand 
for capital brings us to one theory of interest which has been 
widely accepted, — the " productivity theory." To the 
older economists, who regarded most economic questions 
from the point of view of the business manager, it seemed 
sufficient to say that interest is paid because capital is pro- 
ductive, and that the amount of interest is determined by 
the degree of productiveness. From the side of demand we 
may agree that the productivity theory does give us an 
explanation of interest. When capital is very productive 
there will be a great demand for it. 



S44 ELEMENTARY PRINCIPLES OF ECONOMICS 

The Marginal Productivity Theory. — In recent years a 
development of the productivity theory has been brilliantly 
advocated and widely accepted. The theory is essentially 
an application of the marginal utility analysis to the field of 
distribution. The utility of capital is not immediate, as in 
the case of consumers' goods, but intermediate. We use 
capital not to eat or wear, but to help in making things to 
eat and wear. And of capital, as of labor, it may be said 
that the more there is of it, the less productive will any part 
of it be, for two reasons. First, if capital be increased while 
the factor with which it cooperates remains unchanged in 
quantity, the physical product will not increase proportion- 
ately with the Increase of capital. Thus if a thousand work- 
men be supplied at the same task with increasing quantities 
of implements of production, they will, it is true, continually 
increase output, but not in proportion with the increase of 
their equipment. In the second place, the increased output 
will have a less marginal utility. Products to-day are the 
results of widely varying combinations of labor and capital. 
Increasing capital, therefore, by increasing output according 
to the degree in which capital is important in production, 
will in the same varying degree lower the exchange values 
of those goods as compared with the others. Briefly, then, 
it may be stated as a law of capital : other things being equal, 
every increase of capital results in a lowering of its marginal 
value productivity. Adherents of this theory go on to add 
that in the actual world capital receives in interest an amount 
equal to- its marginal productivity. While the productivity 
theory, and still more the marginal productivity theory, may 
offer for some purposes a good way of explaining why men can 
and will pay interest, it does not explain why they must do so. 

The Abstinence Theory. — To understand why interest 
must be paid, we have to investigate the subject of the supply 



INTEREST 345 

of capital, and this brings us first to the so-called " absti- 
nence theory." It has been said by some economists that 
interest is sufficiently explained when it is described as the 
wage or reward for abstinence. As we have seen, capital is 
the result of a special production made possible by saving. 
Saving or abstinence may not in any particular instance in- 
volve any great degree of suffering. Millionaires who do 
not consume at once and finally all that they have, are not 
thereby made to suffer the pangs of hunger. It may be that 
they would have great difficulty in consuming any large part 
of their goods. But saving does mean, none the less, the con- 
sumption of less than one might consume. We cannot have 
capital if all men consume all the goods that they can obtain. 
It may help us to understand the relation between saving 
and interest if we think of actual saving as being the result 
of varying degrees of self-denial. There are probably many 
persons who would rather put by part of their present goods 
even if they could not thus obtain interest, or even if they 
had to pay a slight amount for the safe-keeping of their 
savings. If very little capital were required, therefore, the 
interest rate might fall to zero, since those who wished to 
save would be glad to lend their goods with a simple guaran- 
tee of repayment. But if capital is highly productive and in 
great demand, it will not be possible to secure the desired 
capital from the savings of those whose abstinence represents 
no sacrifice. It may be that when more capital is demanded, 
an increase which will bring the productiveness of the capi- 
tal and the abstinence necessary to its formation into equi- 
librium, may be effected at a rate of one per cent. Suppose 
the productiveness of the capital to be still further increased. 
Then those who wish to engage in productive enterprises 
will be able to pay a higher rate and will increase the demand 
for capital. But, other things being equal, those who would 



346 ELEMENTARY PRINCIPLES OF ECONOMICS 

just save the needed amount of capital at one per cent must 
be paid a higher price if they are to undergo the added sacri- 
fice necessary to the accumulation of more capital. This ex- 
planation should make it clear that on the side of supply it 
is to the marginal estimate of the sacrifice represented by the 
marginal investment that the rate corresponds. We may say 
in conclusion of this phase of the matter, then, that interest 
is fixed on the side of the supply of capital at a point which 
just repays the sacrifice involved in the marginal investment. 
As has been said, this rate, thus fixed, also equalizes the 
sacrifice of the marginal investor with the productivity of 
the marginal capital in use. 

The Austrian — or Agio — Theory of Interest. — There 
is to-day a very general opinion among economists that none 
of the theories that have been explained above really goes 
to the root of the matter. We have, therefore, to explain 
another theory, which has in recent years received a great 
deal of attention. This is often called the Austrian theory, 
from the country of its origin. It is also frequently distin- 
guished as the " agio " theory, from the Italian " aggio " 
(meaning, among other things, discount), because it finds the 
explanation of interest in the fact that future goods are 
discounted in terms x)f present goods, as we shall immediately 
explain. 

We say that capital is productive and hence bears in- 
terest. But why, fundamentally, is it productive and of 
what is it productive ? Strictly speaking, capital is not pro- 
ductive at all. To say that capital is productive is merely a 
short way of saying that human labor produces more by the 
use of capital than without. But granting that capital is 
productive in this sense, what is it that capital produces? 
Generally the things that it " produces " are quite different 
from itself. Machines make shoes. Railways carry goods 



INTEREST 347 

and persons. How can we compare the shoes with the 
machines, or the railway product with the railway equipment ? 
Obviously, if we are to explain interest, we must claim that 
the aggregate value of the things produced is greater than 
the value of the producing agents, and that this difference 
in value is the interest. But have we any right to assume 
that the value of the product is greater than the value of 
the agent ? To be sure, we know that the difference in value 
exists. But, by the same token, we know that there is such 
a thing as interest. It is admitted, too, that the difference 
in value and interest are the same thing, but it is contended 
that the real problem for us is to explain why there is this 
difference in value, which is admittedly interest. Why does 
the value of the aggregate product of capital exceed the 
value of the capital itself ? And so, while certain economists 
explain that the marginal productivity theory is a sufficient 
explanation of the interest problem from the point of view 
of demand, but that it needs to be supplemented by a cor- 
responding theory from the point of view of supply, other 
economists hold that the real explanation of interest lies 
deeper, and that their theory, rightly conceived, is an expla- 
nation of both the supply side and the demand side of the 
interest problem. 

It is the position of the authors of this book that the 
theories explained above are partial. They are " true " in 
so far as they help us to sum up and understand large num- 
bers of economic facts in a simple way. In other words, the 
theories are "true " in so far as they are useful or usable. 
And for many purposes these theories are probably more 
" workable " than the " Austrian " theory, which we shall 
now explain, admitting, though we do, that that theory in- 
cludes in its scope more economic facts, and rests upon a 
deeper, stronger, and more philosophical foundation. 



348 ELEMENTARY PRINCIPLES OF ECONOMICS 

What, then, is it that determines the rate which the mar- 
ginal investor will regard as just repaying him for his saving 
or abstinence ? And what is it that causes the value of the 
aggregate product of capital to be greater than the value of 
the capital itself? These questions both find a common 
answer in the Agio theory of interest, which is usually asso- 
ciated with the name of Professor von Bohm-Bawerk, one 
of the leaders of the so-called Austrian or psychological school 
of economists. To repeat our questions in another form, 
Why is it that men — for instance, the marginal investor — 
will not give $50 now for $50 ten years hence, even though 
all risk should be amply covered by insurance? Why will 
not the marginal investor lend his money without interest 
even when the loan involves no risks? And why is it that 
the value of goods produced by machinery, after deduction 
of amounts representing all other expenses of production, is 
found greater than the value of the machinery itself ? Simply 
because desire, which is the source of value, is stronger for 
things near than for things far away. 

Human experience in a thousand lines furnishes abundant 
proof of this. The wants of men are like Esau's hunger. 
He would rather have — he values higher — a mess of pot- 
tage now than a whole inheritance in the future. " A bird in 
the hand is worth two in the bush." Distant enjoyments 
are vague to men's minds, while near ones are vivid and 
tempting. Thus it is that a man will rarely give present 
goods for future goods of like kind and amount, and hence 
future goods are less valuable than present goods. 

Yet it becomes apparent on a moment's reflection that 
there is the greatest difference among men in the compara- 
tive estimates they place upon the present and the future. 
This is in part (1) a matter of civilization. Thus travelers 
have again and again pointed out that among primitive 



INTEREST 349 

peoples there is the utmost recklessness and improvidence of 
the future. Hence, among savages, if interest were de- 
manded or allov/ed at all, the rate would be very high. The 
comparative valuation of present and future enjoyments 
(2) varies widely also among civilized men. Some there are 
who are almost as recldess of the future as is the savage, 
while there are others who would be glad to exchange a 
quantity of present goods for a like quantity or even a less 
quantity assured to them in the future. The provident 
classes would therefore save even if the rate of interest 
should fall to a very low figure. Finally, (3) the compara- 
tive valuation varies widely according to the affluence or 
loealth of the individual. What we must have to satisfy the 
pangs of hunger to-day is evidently more highly valued than 
the same things can be when obtainable only at a future 
time. Other things equal, then, the millionaire will, of 
course, overvalue the present less than will his poorer neigh- 
bor. The man who has an income just sufficient to satisfy 
his physical requirements cannot save, no matter how high 
the interest rate may be. 

And so the Agio theory sums up for us briefly a multitude 
of facts bearing upon the supply of capital and the demand 
for it. Saving, or investment, and productivity are alike due 
to differences in value between present and future goods of like 
kind and amount. The interest (or agio) is due to this differ- 
ence. And the rate of interest equals and is determined by 
the marginal difference, i.e. by the difference as it exists in the 
minds of investors or savers and determines their marginal 
saving. 

Just one other concrete illustration. Suppose that with 
the interest rate standing at a certain point, something 
occurs to change the minds of the investors. Endow them 
all in equal degree with greater foresight of possible 



350 ELEMENTARY PRINCIPLES OF ECONOMICS 

future pleasures and pains. At once in the minds of all 
there is less difference in their valuation of present and 
future goods. They value the future more highly, and by 
necessity, since value is relative, they value the present less 
highly than they did before. Concretely, they value the 
machine more highly than before; the goods produced by 
it day by day they value less highly. The difference between 
the value of the machine and the value of its aggregate 
product falls. On the other hand, those who have been 
saving save more, w^hile many who have not saved before 
join the ranks of investors, — which means, as we have ex- 
plained in an earlier chapter, that they spend more for future 
goods and less for present goods, thereby bidding up the 
price of machines, and at the same time weakening the market 
for the product of machinery. From this concrete statement 
the student may see how the difference in value of present 
and future goods determines at once the supply of capital 
and the demand for it, and, through their interaction, the 
rate of interest. 

Summary. — Let us now retrace the steps we have taken 
and state in summary form the theory of interest which is 
here developed. Interest is determined primarily by the rela- 
tion between the demand for capital and the supply of it, the 
rate being stwh as will make possible the vndest possible use of 
capital in the existing state of demand and supply. The de- 
mand for capital is determined by its marginal productivity. 
The supply is determined by the marginal sacrifice involved 
in saving or postponement of consumption. Fundamentally, 
supply and demand are both determined by the marginal dif- 
ference in the value of present and future goods of like kind 
and amount, and the rate of interest equals this agio. 

Different Loan Markets. — As we have made clear in the 
foregoing, the loans that lead all others in the modern world. 



INTEREST 351 

and that exercise a controlling injQuence upon interest, are 
(1) loans for the purpose of acquiring and maintaining capital 
equipment for purposes of production. Though the loan is 
usually made in the form of money or credit, it is not the 
supply of money that controls the market for such loans. 
If the capital goods could be secured directly, it would be 
even better and more economical. All that has gone before 
in this chapter, therefore, is in explanation of interest and 
the rate of interest on such loans. 

There are, however, (2) loan markets in which money itself, 
or credit, may practically he regarded as the real end and object 
of the loan. In the " money streets " of great financial 
cities men are regularly incurring obligations which can be 
met by money or credit payment only. If one were to offer 
them other capital goods, the goods would be refused unless 
they could be exchanged at once and without loss for money 
or credit. In these narrow markets, it may in truth be 
said that the rate of interest depends upon the supply of 
money and credit and the demand for them hi those markets. 
And it must further be admitted that in those markets, in 
an unusual degree, the amount of credit depends upon the 
amount of money, largely in the form of gold or gold certifi- 
cates. As the reserves accumulate, the banks find it neces- 
sary to lower the short time interest rate, in order to profit by 
the credit that they may safely build upon the reserves. 
And it thus happens that extreme fluctuations in interest 
rates occur in such markets, even within short intervals of 
time. Thus the " street " in New York has seen the " call 
rates " fluctuate within a few months from 1 per cent to 
100 per cent. It cannot be too strongly emphasized, how- 
ever, that the student should keep the thought of money or 
credit entirely out of mind when he is considering or dis- 
cussing the general problem of interest. 



352 ELEMENTARY PRINCIPLES OF ECONOMICS 

The interest paid on (3) loans of ivealth which is not capital, 
— not used for purposes of further production, — is governed 
by the rate of interest paid for capital. It is the same per- 
centage of value. The obvious reason is the power of the 
owner to sell his noncapitalistic goods and invest the pro- 
ceeds in capital goods. If we should adopt the view that 
houses are not capital, but simply " consumers' goods," we 
should similarly have the rate of interest governed by the 
forces controlling the rate of interest on capital. 

Practical Circumstances Affecting the Rate. — There is 
both a real and an apparent fluctuation in the interest rate 
from place to place and from time to time. The apparent 
fluctuation is that which is due to the inclusion of insurance 
against risk in a single rate with the real interest. Thus 
loans on good security always command a lower rate than 
others. This simply means that a man who takes some 
risks as to getting his money back adds to the pure interest 
a premium to cover the risk. Gross interest, then, includes 
the two elements of net or pure interest, — payment for 
the loan itself, — and insurance against risk of loss, or of 
trouble in collection. Naturally, therefore, interest tends 
to be higher in uncivilized countries and backward communi- 
ties. Again, loans that run for years usually command a 
slightly lower rate than loans made for months, because with 
such loans the lender is saved the trouble of frequent rein- 
vestment. Aside from these conditions, moreover, a steady 
diminution of pure or net interest occurs in most civilized 
countries. This last change is due, not to lessened risk, but 
to the change in mental comparisons between present and 
future goods. Present wants, being better satisfied, are 
less clamorous and contrast less vividly with future wants. 
Moreover, providence increases with civilization. The 
lowering of the pure interest rate means that the great body 



INTEREST 353 

of people are both less needy in the present and more thought- 
ful of the future. 

The Recent Rise in the Interest Rate. — We began our 
discussion of interest with the careful explanation that it is 
determined fundamentally, not by the supply of money, but 
by the supply of capital. Later we qualified this by explain- 
ing how in the pure " money " markets of financial centers, 
the rate of interest varies inversely with the volume of avail- 
able money and credit. The student may have a moment 
of amazed impatience when now he is finally told that, under 
certain circumstances, interest varies directly with changes in 
the volume of money and credit. Yet precisely this must now 
be said and explained. Between 1900 and 1915 there was 
an almost uninterrupted rise in the rate of interest on long- 
time loans represented by such securities as bonds. Bonds 
paying as low as three and four per cent, or even less, could 
be sold at par in the opening years of the century. Those 
same bonds now sell at a heavy discount, so that the pur- 
chaser at the lower price receives an interest yield on his 
investment rising to six per cent or over. And bonds of 
some great railways now have to offer interest rates of six 
per cent or better in order to sell at par. 

We have already explained in another chapter the re- 
markable rise in the general price level that has resulted 
from the great increase of money and credit in the years 
from 1897 to 1915. In all that period manufacturers were 
buying materials and labor at the price level of one period 
and selling the finished product at the price level of a slightly 
later time. Broadly speaking, there was a continually re- 
curring gap between the two price levels, which redounded 
to the advantage of the manufacturer. Under such circum- 
stances, business men were more keenly competitive in the 
urgency of their demand for the world's stock of capital 
2a 



354 ELEMENTARY PRINCIPLES OF ECONOMICS 

goods, and this sharpened demand tended constantly to force 
up the price paid for the use of capital, i.e. interest. 

On the other hand, as we have explained in the chapter 
on Money, inflation of money and credit lessens the purchas- 
ing power of money. A man who put $1000 into a savings 
bank in 1900 would find when he withdrew it in any subse- 
quent year that he was getting back less purchasing power 
than he had originally put in. Under such conditions, long 
continuing, there would be a tendency for those who saved 
to avoid saving except at a higher rate. And this higher 
rate, as we have seen, business men would be led by keen 
competition to pay. 

This same phenomenon may also be explained from the 
point of view of the Agio theory of interest. Steady and 
long-continuing rise of prices results in an increase in the rela- 
tive value of present as compared with future goods, thus 
affecting in the same way the economic calculations of those 
who use capital and of those from whose saving the capital 
is derived. 

In conclusion, it should be emphasized again that in this 
case it is really the capital interest that undergoes a change, 
although here it is a great and long-continued change of the 
quantity of money that results in the new equation of capital 
demand and capital supply. 

Usury. — The word " usury," once applied to all interest, 
is now applied only to interest in excess of the rate allowed 
by law. The question of whether laws should be framed 
limiting the rate to be received and fixing penalties for vio- 
lation has been much discussed. Economists are generally 
agreed that the state should not attempt to establish a rate, 
except so far as it can confine the action of the law to loans 
to the needy for personal consumption. In cases of this 
kind the experience of the world is increasingly in favor of 



INTEREST 355 

regulation. One effect of usury laws is worthy of special 
notice. When the law has established a fixed rate, under 
penalties, it may happen that law-abiding people will be un- 
willing to make loans at the legal rate, and that those who 
are willing to violate the laws will thus have an added reason 
for charging a higher rate than they otherwise would. Com- 
petition among lenders is lessened, and the risk of lending 
is increased. Both these items act in the direction of exces- 
sive rates. Though many countries have laws designed to 
prevent the taking of excessive interest, the commercial 
world, which is regulated in great measure by the honor of 
business men, commonly proceeds in disregard of the law's 
penalties. Those who borrow at excessive rates do so will- 
ingly and knowingly, and are in honor bound not to appeal 
to the law to escape their just debts. 

SUMMARY 

1. Interest is the reward paid for the use of capital. 

2. Capital differs from land in that it is produced. Social capital 

consists of aU producers' goods. 

3. Speaking generally, interest is determined by the relation be- 

tween the supply of capital and the demand for it, at a 
point or rate which equalizes the supply and the demand. 

4. The demand for capital depends upon its marginal productive- 

ness, the value of its product. 

5. The supply of capital depends in general upon its cost of pro- 

duction, i.e. upon the sacrifice involved in postponement 
of consumption by the marginal saver or investor. 

6. The cost of postponement of consumption arises from the fact 

that men regularly value more highly the present as com- 
pared with the future, and the cost is therefore measured 
by the extent of this higher valuation. 

7. The same difference in value of present and future goods ex- 

plains why capital is "productive." 

8. Capital loans should be distinguished carefuUy from loans of 

money. 

9. The interest rate, as ordinarily quoted, reaUy measures the 

return for risk as weU as the return for capital, which is 



356 ELEMENTARY PRINCIPLES OF ECONOMICS 

pure interest. Both gross interest and pure interest tend 
to fall with advancing civilization. 
10. During periods in which an increase of money and credit 
results in a steady rise in general prices, the rate of in- 
terest on long-time loans rises to offset loss in the capital 
value of the loan. 

QUESTIONS FOR RECITATION 

1. What are the differences between capital and land? The 

resemblances ? 

2. What is interest? How was the taking of interest regarded 

in early times? 

3. What is the supply and demand theory of interest? What is 

the marginal productivity theory? What element of truth 
does it contain? What is the abstinence theory? What 
element of truth does it contain? What is the Austrian 
theory ? Are these theories necessarily contradictory ? 

4. State in summary form the complete theory of interest. 

5. Is it right to say that the cost of capital is abstinence ? What 

is meant by marginal investment? How do relative valua- 
tions of present and future compare in the case of children 
and adults? Of children and savages? Of rich and poor? 
What relation has this to interest? 

6. Show in detail the services rendered to production by capital. 

7. What different loan markets are to be distinguished? How 

is the "rent" of houses determined? 

8. What two elements are there in the ordinary interest rate? 

What is pure interest? What two reasons are there for 
a fall in the interest rate with advancing civilization? 

9. What is usury? What are usury laws? In what cases are 

usury laws beneficial ? 
10. Why has the interest rate on bonds risen since 1900? 

QUESTIONS FOR STUDY AND DISCUSSION 

1. The word interest is of Latin origin. What is its original 

meaning ? 

2. Could the rent of an acre of land be represented as interest? 

3. What would be the effect on interest of an instantaneous dou- 

bling of the world's capital? Of increasing the efficiency of 
the present stock of capital? 

4. Explain the differences in rates of interest in different sections 

of the United States. 



INTEREST 357 i 

5. If the present product of industry in the United States were 

more evenly distributed, what would be the effect upon sav- ,' 

ing? upon productivity of capital? upon relative values of J 

present and future goods ? | 

6. What are some of the effects of war on capital and investment? j 

j 

LITERATURE j 

See list of works cited at close of Chapters II and III. Also : — ! 

Bohm-Bawerk, E. von: Capital and /nieresi, Translator's Preface, ■ 

pp. xix-xx; also Positive Theory of Capital, Bk. V, Ch. Ill, : 

pp. 253-259. i 

Clark, J. B. : The Distribution of Wealth, Ch. XII, pp. 182-187. ] 

Walker, F. A. : Political Economy, Pt. IV, Ch. Ill, pp. 218-232, ] 

and Pt. VI, § 1. ; 

All standard works on Economics discuss these topics. i 



CHAPTER V 
PROFITS 

Economists recognize a fourth regular share in the distri- 
bution of the social income, though they have not been 
agreed as to precisely how it is determined. The name 
" profits " is commonly used to denote the total return to 
the entrepreneur from the sale of his product, after the pay- 
ment of wages for labor employed and a further payment 
for land and capital hired. It is evident, however, that this 
return is not a simple one, but contains payments for several 
elements that call for separate treatment. We shall there- 
fore speak of this return as gross 'profits, and inquire of what it 
consists, thus leading the way to an understanding of the net 
return which may be called, by contrast, yure or net profit. 

1. Rewards to Other Factors of Production. — 1. Interest. 
— In the first place, it is evident that the return which the 
entrepreneur receives is in part due to the factors of pro- 
duction which he himself owns and uses in the business. 
The return to his capital invested is really interest, as truly 
as if it were to be paid to another person who owned the 
capital instead of to the entrepreneur owner himself. In 
estimating net profits, therefore, careful bookkeeping will 
deduct from gross profits interest on capital invested by the 
entrepreneur. 

2. Rent. — The same thing, of course, holds true of land 
owned by the entrepreneur. Rent should be charged off in 
the same way as to an outside owner. 

358 



PROFITS 359 

3, Wages, Including Wages of Superintendence. — The ele- 
ment of wages and salaries of every sort, including a regu- 
larly estimated amount for the entrepreneur himself, should also 
for scientific purposes be separated from gross profits in the 
calculation of net profits. Private and public corporations 
do this regularly, and the practice is frequent in those large 
non-corporate businesses in which the entrepreneur is em- 
ployed just as is any other laborer. 

II. Charges of Maintenance. — 1. Replacement Fund or 
Depreciation Charge. — In the second place, deduction must 
be made from gross profits of a sum sufficient to provide for 
the maintenance of the capital, or its replacement, as it is 
gradually used up, or as it is suddenly destroyed. Modern 
business bookkeeping commonly provides for the replacement 
of gradual impairment by keeping a separate account for 
what is called a maintenance fund. A man is facing business 
ruin who takes and consumes as profits from his plant what 
should be set aside for its upkeep and replacement. 

2. Insurance. — The same may be said of the payment 
to provide against risk, which may be called insurance. 
The amount of money which a careful business man sets 
aside from the unusual gains of prosperous years to secure 
himself against disaster from losses in lean years is not 
profit. Insurance in this sense is much broader than insur- 
ance against fire, hail, etc., for which a policy may be taken 
out and a definite premium paid. It must be noticed that 
when a separate charge is made to cover such risk, the allow- 
ance for interest on the capital must leave out the part due 
to risk which we have seen to be present in gross or market 
interest ; in other words, the interest will in such a case be 
the pure interest. 

III. Extra-Personal Gains. — 1. Monopoly Gains. — Even 
with all these deductions, the analysis is not complete. We 



360 ELEMENTARY PRINCIPLES OF ECONOMICS 

must, in the third place, deduct extra-personal gains, — 
gains which are not due to the eflBciency of the manager. 
One of these sources of gain lies in the possession of a mo- 
nopoly advantage. Monopoly gains are a separate item in 
distribution, and if they are to be called profits, as they 
frequently are, we must carefully distinguish the particular 
nature of such profits. 

2. Conjunctural Gains. — Closely resembling monopoly 
gains in certain respects is a class of gains known in recent 
economic discussion as conjunctural. As the name indicates, 
these are extra-personal gains resulting from a favorable 
conjuncture of circumstances, which could not have been fore- 
seen. A simple instance of such a gain is seen in the profits 
made by retail dealers when the sudden death of a great 
personage creates unusual demand for mourning goods. 
Stocks of black goods which the merchant may have cen- 
sured himself for accumulating may suddenly become the 
source of a considerable conjunctural gain. Here, however, 
a very real difficulty presents itself. In instances like that 
just mentioned, the conjunctural element can be plainly 
distinguished. But it often happens that such gains are at 
least in part the reward of foresight and energy, and are 
therefore to be classed as pure or net profit. The man who 
makes a fortune by buying up suburban property in an un- 
likely neighborhood, because he has had sufficient sagacity 
to foresee growth of population in that direction, may claim 
with some reason that his gain is not conjunctural. Even 
more rejasonable would his claim be if, after buying the 
property, he himself directed the movement of population 
in that direction by securing improved rapid transit facili- 
ties and by other familiar expedients. In real life all the 
stages between clever business foresight and pure conjunc- 
ture are to be observed. 



PROFITS 



361 



IV. Pure or Net Profits. — Our analysis, then, gives us 
as our concept of pure or net profits all that is left after 
deducting the items mentioned. Of course it will be under- 
stood that not every business shows in its gross profits all 
these different items. Sometimes it may even happen that 
there need be no further deductions than those for wages 
and a maintenance fund. But some of the other items are 
usually present in the estimate of gross profits. 

How Net or Pure Profit is Determined. — Society must at 
any time pay for its goods a price sufficient to give even the 
most inefficient manager whose services are necessary to the pro- 
duction of the supply, an amount covering the items other than 
net profits. But no pure or net profits will accrue to such a 
marginal entrepreneur. More efficient managers will, there- 
fore, be able to secure differential profit, the amount of the dif- 
ferential in every case being determined by the extent to which these 
entrepreneurs individually surpass in efficiency the entrepreneur 
of only marginal efficiency. Pure or net profit, therefore, is a 
purely personal gain — a return to superiority of management 
as such, independently of monopoly advantage, favorable con- 
juncture, or the mere labor of the manager as a superintendent. 

Summary. — Let us summarize the considerations just 
presented : — 



Gross Profits 



Reward to [ Interest on entrepreneur's capital, 

other factors \ Rent of entrepreneur's land, 
of production [ Wages for entrepreneur's service. 

Charges of f Replacement fund, 
maintenance [ Insurance fund. 

Extra-personal J Monopoly gains, 
gains 1 Conjunctural gains. 

-s^ 1 ■ \ Differential or pure profits. 

Personal gams [ ^ ^ 



362 ELEMENTARY PRINCIPLES OF ECONOMICS 

Pure Profit and Rent Compared. — This explanation of 
the determination of pure profit as a surplus due to the su- 
periority of a given entrepreneur over the marginal or poorest 
entrepreneur who can afford to stay in business at the cur- 
rent price of the product, is, as the student will doubtless have 
noticed, strikingly like the explanation of the determination 
of rent. Thus, ivhile tvages mid interest are price determin- 
ing, entering into the price of the product, rent and profits 
are price determined; they do not enter into the price of the 
product. Pure profit has hence been called, not inaptly, 
personal rent, or the rent of managing ability. Again, as 
with rent, it is interesting to notice the corollary that it is 
not the able managers, receiving large pure profit, any more 
than the fertile land, receiving large rent, that makes the 
prices of commodities high. If all land were of the highest 
grade of fertility, the price of produce would be lessened; 
and in the same way, if all managers were of the same order 
of talent as our ablest managers, goods would be produced 
at a lower marginal expense, and society would reap the 
benefit in lower prices. But there is this marked difference 
between the rent of land and pure profits. The more fertile 
lands can exercise little influence in raising the quality of 
inferior soils, while superior entrepreneurs are always tend- 
ing to make the knowledge and skill requisite for success a 
matter of common property. As business becomes more 
completely organized, falling more and more into routine; 
as knowledge becomes more widely diffused throughout the 
business- community ; and as governments improve in regu- 
larity and firmness and honesty, the marginal expense of 
production and the resulting prices tend to fall, and profits 
in consequence tend to lower and lower limits. It is in this 
sense that profits may be spoken of as " the lure that insures 
improvement." 



PROFITS 363 

Pure Profit and Monopoly Gains Contrasted. — Under 
sharp and increasing competition, pure profit rests upon a 
precarious foundation. If the special abihty upon which 
the profit depends is such as cannot be dupHcated, the profit 
will perish with the single possessor; if the special ability 
can be duplicated, rival concerns will possess themselves of 
entrepreneurs of equal efficiency, and the special advantage 
tends to disappear through competition. But, as we have 
said, there are certain permanent extra-personal advantages, 
entirely equivalent otherwise to natural ability, which may 
become the exclusive and permanent property of a business 
organization. In case of such possession, competition is 
either entirely impossible or it is possible only on terms 
which give to the holder of the monopoly advantage a con- 
siderable differential return. When such an advantage is 
enjoyed, the power of competition over price is removed; 
prices no longer stand at the point of cost; and a surplus 
over rent, wages, interest, and profits is a regular result. 
Unless interfered with by legislation, there could be no out- 
side influence to prevent a monopoly from asking any price it 
pleased, subject only to the action of the law of monopoly 
price which has been explained in the chapter on Monopolies. 

Another sharp contrast between pure profits and monopoly 
gains lies in the fact that whereas pure profit is a surplus 
produced by superior efficiency, and is in so far no burden to 
the community, — which, indeed, tends to gain by it in the 
end, — monopoly profit, on the other hand, is a surplus 
extorted by power and privilege, and is usually a source of 
loss to the community. Distribution of wealth is coming 
increasingly under the influence of monopoly. The eco- 
nomic surplus taken by monopoly is the source of many of 
the largest fortunes of our day, and is one of the main causes 
of the growing inequalities of fortune, especially since our 



364 ELEMENTARY PRINCIPLES OF ECONOMICS 

Civil War. While, in general, competition increases in 
severity, an increasing proportion of the industrial field is 
withdrawn from competition and falls under the control of 
monopoly. 

In passing judgment on big business to-day, therefore, 
it is most important to discover whether the size of the 
business and of its profits is due to some monopoly advantage 
or advantages, or whether it is due simply to the unusual 
ability of its managers. 

Capital and Capitalization. — In considering monopoly 
gains, it is important to understand the distinction between 
capital and capitalization. Capitalization means the amount 
at which a business or property is valued. The word is there- 
fore used in the language of the market in two ways. It is 
sometimes used to describe the par value of the stock and 
other securities issued by the company, as representing the 
company's nominal valuation of the business and its earning 
power. The word is also used to denote the market value 
of the business or of its securities taken as a whole. Thus a 
company may be capitalized at $10,000,000 in the sense that 
its securities have that par value, while the market estimate 
of the value of the business, as reflected in the prices paid 
for its securities, may be much less or much more than 
$10,000,000. Capitalization in either of these two senses 
may be many times the amount of capital actually invested, 
since it is based, not on investment or material cost, but upon 
earning power. 

When we speak of current interest as being 5 per cent, we 
mean that free and disposable capital can regularly command 
that rate of return in competitive industry. Let us suppose 
that the return on equally safe investments that are open 
to all is about 5 per cent, while the annual return to a great 
oil company, which has actually invested $100,000,000 in 



PROFITS 365 

the business, is 50 per cent. The business may in that case 
be capitahzed at $1,000,000,000, in such a way that the great 
earnings on the actual investment will appear as only 5 per 
cent on the capitalization. To those who are ignorant of the 
difference between capital and capitalization, monopolies 
can often, by such a plan as this, appeal successfully for 
sympathy and support on the ground of insufficient earnings, 
even when the return on their actual investment is many 
times the market rate. 

As profits on new investments in competitive industries 
fall, the capitalization of monopoly earnings may be raised 
in proportion, even without the investment of new capital. 
For instance, if a monopoly has an earning power of S50,000 
a year, the capitalization of this return at 5 per cent would 
stand at $1,000,000. If, then, the current rate of interest 
should fall to 4 per cent, while the monopoly earnings suffered 
no change, the capitalization of the monopoly, represented 
by the market value of its securities, would rise to $1,250,000. 

And yet it must be remembered that the owners of the 
stock of monopolistic businesses often include many persons 
who have paid on the basis of the capitalized value, and who 
do not therefore receive from the monopoly a greater return 
than they would receive from investments in competitive 
industry. It is those who " get in on the ground floor," 
and who are thus enabled to sell at the capitalized value 
stock which they have received on the basis of actual invest- 
ment, who divide among them the capitalized monopoly 
earnings. 

SUMMARY 

1. The word "profits" as ordinarily used in business often includes 
many elements of income which are not really profits. The 
total surplus left in the employer's hands after the payment 
of contract wages, rent, and interest should be called gross 
profits. 



366 ELEMENTARY PRINCIPLES OF ECONOMICS 

2. To obtain the net profits of a business there must be subtracted 

from the gross profits (1) a normal return for the employer's 
own capital, land, and services, i.e. interest, rent, and wages 
of superintendence ; (2) charges of maintenance, including 
funds for replacement and insurance ; (3) extra-personal 
gains, including those arising from monopoly and from chance. 

3. The remainder, or the pure net profit, is a differential return 

due to the superior ability of the entrepreneur, and is in 
many respects similar to rent. 

4. Pure profits tend to diminish, other things being equal, as 

education becomes more widely diffused and as industry 
becomes more completely organized under regular routine. 

5. Monopoly profits, on the other hand, have a more permanent 

character in the absence of government interference. 

6. Under modern conditions of business, monopoly profits are 

often disguised by their form of capitalization. 

QUESTIONS FOR RECITATION 

1. What are gross profits? What is the difference between gross 

profits and pure profits? 

2. Name the deductions that must be made from gross profits to 

arrive at net profits. 

3. What is the replacement fund ? Insurance fund ? 

4. What are the two classes of extra-personal gains? What is 

meant by the word " conjunctural " ? Mention instances of 
conjunctural gains that have fallen under your observation 
or that you have met with in reading. 

5. What caution must be observed in estimating conjunctural 

profits ? 

6. Why are pure profits like rent? How do pure profits and rent 

compare as to their tendency to increase or decrease ? What 
effect does competition have in the long run on pure profits? 
On monopoly profits ? 

7. Why is it that monopoly profits often appear to be only equal 

to the normal interest rate? What bearing does this have 
upon popular opinion regarding monopolies ? 

8. What is the difference between capital and capitalization? 

Explain the process of capitalization. 

9. What is the effect of a falling interest rate upon the capitalized 

value of a monopoly privilege? 



■} 

PROFITS 367 I 

'f. 

QUESTIONS FOR STUDY AND DISCUSSION | 

1. What effects upon profits are to be expected from general 

education? from industrial education? from the develop- | 
ment of trade publications? 

2. Trace the resemblance between profits and wages in the case of , 

a great singer. : 

3. How far is it possible to discover the several distributive shares ) 

in the financial statement of a railway or industrial corporation ? ] 

4. If industrial change and progress were to stop, would profits be 

affected? 

5. What are some of the different ways in which the superior j 

entrepreneur may manifest his superiority? If an entre- ', 

preneur who excels in marketing his product unites with an ] 

entrepreneur who excels in factory management, what ■ 

results may be expected? i 

;i 

LITERATURE i 

See note on literature at close of preceding chapter. Also : — ', 

Ely, R. T. : Monopolies and Trusts, Ch. III. ' 

Jenks, J. W. : The Trust Problem. i 

Meade, E. S. : Trust Finance. : 

Report of the United States Industrial Commission, Vol. XIX, i 

pp. 724-730. i 

Taussig, F. W. : Principles of Political Economy. ' 

Walker, F. A. : Principles of Political Economy. i 



CHAPTER VI 
SOCIALISM 

The Relation of Socialism to Distribution. — In the pre- 
ceding chapters we have explained how in the existing social 
organization the annual produce of industry — the social 
income — is distributed. As we stated at the outset, the 
method of distribution is intimately connected with the legal 
structure of society, and particularly with the laws of 
property. Society, as it exists in all advanced nations, 
accepts private property as its economic basis. In other 
words, in the great majority of goods, private proprietorship 
or private appropriation is not only permitted but encour- 
aged, and the result is the system of distribution which has 
been described. 

There are considerable differences in the laws about 
property observed by different nations, and minor changes are 
constantly being made; and these differences and changes 
result in corresponding differences and changes in distribu- 
tion. It would take us too far afield to attempt to treat of 
them in detail. But socialism, which may be described as 
a plan for changing the very foundation of our economic 
organization, has been proposed and discussed so seriously, 
and commands to-day so many enthusiastic advocates, that 
we cannot pass it by in silence in our analysis of economic 
theory. 

Such a fundamental change as socialists propose would, 
we shall see in the following pages, profoundly affect every 

368 



SOCIALISM 369 

one of the four phases of economic activity which we have 
chosen as the natural divisions of economic analysis, — con- 
sumption, production, exchange, and distribution. But 
socialism has been put forward more particularly as a remedy 
for existing evils in the distribution of the social income, and 
we may therefore treat the subject properly under that head. 
It may be noted in passing, moreover, that in general dis- 
cussions of the proposed change it is commonly assumed that 
labor and wages would be especially affected, and socialism 
is therefore often handled in direct connection with the sub- 
ject of wages and plans for improving the status of labor. 

General Characteristics. — We have already described 
some of the various changes in the relation of the laborer 
to the product of his labor that have been tried or put for- 
ward. It has been pointed out that one of these plans, 
cooperation, may be either voluntary or coercive, — that 
is, ordered and controlled by the state. Now coercive 
cooperation is but another name for socialism. What, then, 
is socialism ? It is, in fact, coercive or compulsory coopera- 
tion, not merely in undertakings of a monopolistic nature, 
but in all important productive enterprises. Socialists seek 
the establishment of industrial democracy through the agency 
of the state, which they hold to be the only instrument for 
accomplishing their end. They would expand the business 
functions of government until all dominant kinds of busi- 
ness are absorbed. They would have all such business regu- 
lated by the people in their organic capacity, every man and 
every woman having essentially the same rights as any other 
man or Woman. Our political organization would become 
also an industrial organization, with universal suffrage. 
Private property in profit-producing business and rent- 
producing land would be abolished, although private property 
in incomes would be in the main preserved. What is desired 
2b 



370 ELEMENTARY PRINCIPLES OF ECONOMICS 

by the socialist, then, is not, as is supposed by the unin- 
formed, a division or diffusion of property, but rather an 
increased concentration of a very large part of property. 
The socialists do not complain that productive property is 
concentrated too much, but they object that it is not yet 
sufficiently concentrated. They therefore rejoice in the 
formation of trusts and combinations, regarding them as a 
development in the desired direction. 

The Four Elements of Socialism. — There are four char- 
acteristic features of pure socialism : first, the common 
oivnership of the means of production; second, the common 
management of the means of production; third, the distribu- 
tion of the product of industry by common authority; fourth, 
private property in the greater part of income. Socialists make 
no war on capital, strictly speaking. What socialists object 
to is not capital, but the private capitalist. They desire to 
socialize capital and to abolish capitalists as a distinct class 
by making everybody, as a member of the community, a 
capitalist ; that is, a joint owner of substantially the whole 
of the capital in the country. 

In support of this plan, socialists generally claim that labor 
creates all wealth. No rational socialist means by this to 
deny that land and capital are factors or agents of produc- 
tion ; but, as they are only passive factors, the socialist holds 
that their owners should not receive a share of the product 
simply through such ownership. Man is the only active 
agent, and all production is conducted for the sake of man. 
Socialists admit that, with industry organized as it is now, 
the owners of land and capital must receive a return ; and 
hence they desire that these tools should become social 
property. 

Distributive Justice. — The central aim of socialism, its 
pivotal point, is distributive justice. While it seeks to in- 



SOCIALISM 371 

crease production by more efficient organization and better 
methods, its leading thought is the just distribution of the 
product. The ideas of sociahsts on the question of what 
constitutes justice in distribution are not harmonious. 
Some say that (1) equality meets the claims of justice ; others 
urge (2) distribution in proportion to real iieeds, so that each 
man may have the economic means for his fullest develop- 
ment; while yet others say that justice demands distribu- 
tion (3) in proportion to merit or service rendered — but that 
the service must he that of the individual, not of his ancestors. 
Socialism, an Extension of Existing Institutions. — The 
English government now monopolizes the postal service, the 
telegraph, and the telephone ; nearly all governments, local 
or central, control the roads ; some own canals and railways ; 
many even possess factories of various kinds, and probably 
every national government does at least a little manufactur- 
ing; many of them also plant forests, and some cultivate 
arable land. We have already seen that governments 
already touch the business world in the following ways : 
(1) they protect person and property; (2) they create and 
guarantee certain special privileges; (3) they regidate the terms 
of contract and of competition; (4) they participate in private 
enterprises by favorable tariffs, bounties, subsidies, etc.; (5) they 
carry on certain industrial processes, such as the construction 
and , maintenance of roads, parks, lighthouses, telegraphs, 
coins, etc. To picture to ourselves socialism pure and 
simple, therefore, we have only to imagine an extension of 
what exists already until a point is reached where society, 
through its government, cultivates the land, manufactures 
the goods, conducts the exchanges, and in short prosecutes 
most productive enterprises. Such private industrj^ alone 
would be permitted as would not threaten the dominating 
power of society in production and in distribution. Thus 



372 ELEMENTARY PRINCIPLES OF ECONOMICS 

individuals would probably be allowed to cultivate small 
areas of land, and, here and there, there might perhaps exist 
a private printing-press supported from private income. 

Not All Public Business is Socialistic. — It must be ob- 
served that it is not every public activity in relation to in- 
dustry which is socialistic. Properly speaking, that only can 
be considered socialistic which tends to render government 
dominant throughout production. Does any proposed meas- 
ure tend to the suppression of production by individuals 
or by voluntary cooperation, and to its absorption by the 
government? Then it is socialistic; otherwise it is not. 
This is the only way to distinguish between socialistic and 
nonsocialistic, or even antisocialistic measures. It fur- 
nishes us with a rational ground for judgment. Are com- 
pulsory education and free schools socialistic? By our test 
they are decidedly antisocialistic. By developing capacity 
for self-help they enable those who grow up under their 
influence to make the best of existing institutions. They 
are, indeed, a conservative force. Is municipal ownership 
of gas works, electric-lighting works, or other natural monop- 
olies, socialistic? No; for they accord with the modern 
tendency to separate sharply the proper industrial functions 
of private persons from the proper industrial functions of the 
organized community. There is a sound principle — not 
socialistic — underlying the modern tendency. The con- 
viction is gradually being forced both by theory and by 
experience that most of those industries which are natural 
monopolies will in the end be owned and worked by govern- 
ments, and that outside the field of natural monopoly there 
is a territory sharply defined in which business can flourish 
only in the atmosphere of private enterprise and competition. 
If we separate thus frankly and rationally the private from 
the public industrial sphere, we lay firmly the strongest 



SOCIALISM 373 

possible foundation for the existing industrial order, in- 
stead of allowing men to drift haphazard into socialism or 
chaos. 

Socialism makes perhaps its most powerful claim when it 
pleads, first, for a scientific organization of the. productive 
forces of society, and second, for a just distribution of the 
social income from production. 

1 . The Relation of Socialism to Production. — When the 
opponent of socialism objects to that system on the ground 
that an equal division of the social income would result 
in portions pitifully small for each individual, the socialist 
replies : " There is little to divide now, naturally enough. 
Competition is wasteful. Two railways run where one 
would be enough. Three times as many milk wagons, 
horses, and drivers are required to serve the people with 
milk as would amply suffice if the business were organized 
on the plan of the distribution of letters and parcels. Look 
at the shops, wholesale and retail, and note the waste of 
human force. Millions of dollars are expended annually in 
advertising, and this sum would be saved in the socialistic 
state. Without competition the whole dry goods and grocery 
business could be conducted with a third of the present ex- 
penditure of economic energy. Reflect, too, on all the idle 
classes in society, both the idle rich and the idle poor. Social- 
ism would find a place for every man, and would put all into 
their proper place, and by making each dependent on his 
own exertions for success, would stimulate our energies." 
The socialistic argument, continued indefinitely in this strain, 
is telling. It does not prove the point, however, unless we 
grant three assumptions : first, that present toaste and idle- 
ness cannot be suppressed altogether or diminished greatly 
without departing from the fundamental principles of our 
existing order ; second, that in the advantages of competition 



374 ELEMENTARY PRINCIPLES OF ECONOMICS 

there are not social gains which more than outweigh the social 
losses just described; and third, that socialism is practicable. 

2. The Relation of Socialism to Distribution. — Distribu- 
tive justice advances also a strong plea for the adoption of the 
program of socialism. It cannot be claimed for a moment 
that every man's income is now adjusted to his social service. 
An income proportioned to desert appeals to a sense of right 
and fitness ; but cannot we approach more closely to that 
ideal than at present through social reform, without going 
to the extreme of social reorganization? No doubt the idle 
man is morally a thief. He receives, but in return he gives no 
personal effort. Any man who has not earned the right of 
repose by his own past services, with fruitful physical or 
mental toil, is a shameless cumberer of the earth, unless, in- 
deed, he is incapacitated for useful employment. 

Social Obligations of Wealth. — We may derive hope 
from the fact that men everywhere are coming now to recog- 
nize the social obligations resting on the individual. Dr. 
James Fraser, late Bishop of Manchester, expressed the idea 
in words the essential thought of which is this : " Most of 
us are compelled by our necessities to render service to our 
fellows. Some of us, however, have inherited or received 
money in some way without a return on our part. We are 
placed by God on our honour. It becomes a matter, not of 
physical compulsion, but of honour for us to serve our fel- 
lows." What is here said would apply also to those who 
become wealthy through the accidental discovery of valu- 
able treasures, such as oil, natural gas, or gold on or under 
the soil which they own, or through the growth of cities, 
which adds immensely to the value of favored land. Were 
you to receive an accession of wealth in such a way, the 
wealth would be yours in the eyes of the law, but morally it 
would be simply a new opportunity for helping the progress 



SOCIALISM 375 

of humanity. It is the clear reahzation of this idea that 
leads men of wealth, especially in America, to endow so 
generously universities and other institutions for the public 
welfare. This idea is contained in the epigram, now famous, 
of one of our richest manufacturers, " To die rich is to die 
disgraced." 

3 and 4. The Relation of Socialism to Exchange and Con- 
sumption. — We cannot find the space necessary to discuss 
all the economic changes that would appear in a socialistic 
state. It must suffice merely to note that exchange and 
consumption, as well as production and distribution, would 
be revolutionized. A credit economy might supersede en- 
tirely our present mixed money and credit economy, and 
socialism, to be consistent, would have to make exchange 
values accurately proportionate to costs in human labor and 
in other sacrifice. Moreover, equitable distribution of a 
product largely increased, if it could be achieved, would of 
course be rejflected in the amount and character of the goods 
consumed. Particularly, it may be supposed that inclusive 
or common, as contrasted with exclusive, enjoyment of 
wealth would fill a much greater place in the life of a people 
socialistically organized. 

The Weaknesses of Socialism. — In considering socialism 
as a scheme for social reconstruction, a number of difficulties 
are suggested. Prominent among these is (1) the probable 
numbing effect of the system upon individual initiative 
and energy. What motive to activity can take the place of 
the desire for individual and family advancement through 
the accumulation of private property? Another very grave 
difficulty lies in (2) the introduction of the requisite unity in 
the organization and management of industry. In some in- 
dustries where the work is of a routine nature, the problem 
of organization may not be impossible of solution. But 



376 ELEMENTARY PRINCIPLES OF ECONOMICS 

what shall we say of such industries as agriculture, which 
has hitherto resisted all efforts at centralization? In the 
third place, (3) the socialist state would have the herculean 
task of apportioning work of all conceivable degrees of diffi- 
culty and disagreeableness among the workers. How could 
this be accomplished without engendering a universal dis- 
content that would be fatal to the plan at its first inception ? 

Again (4) the danger to personal freedom under the pro- 
posed system seems very real. Up to a certain point, it is 
true, government seems to improve as its functions increase 
in number and importance. But would this hold true 
indefinitely? We may even grant, for argument's sake, 
that, as our very livelihood would depend on the efficiency 
of government, all the force and energy that are now ex- 
pended in private service would be diverted into public 
channels. But what would happen if, in spite of all pre- 
cautions, some unscrupulous combination should secure con- 
trol of the state? Would there remain, inside or outside of 
the government, standing ground for effective, yet pacific, 
opposition? It is to be feared that there would not. Dis- 
satisfaction would exist, for human nature is such that man 
cannot be thoroughly satisfied with his surroundings. The 
danger is that, without proper means for its expression, this 
dissatisfaction would grow and spread beneath the surface 
of society, until, having no other vent, it would at last issue 
in revolution. 

Finally, we may lay down the general rule that (5) the 
domination of a single industrial principle is dangerous to 
civilization. Many writers have pointed out that it was the 
dominance of a single social principle that led to the down- 
fall of the old civilizations. What is needed is a coordina- 
tion of the two principles, — the principle of private and of 
public business. It is desirable that some should serve the 



SOCIALISM 377 

public in an oflScial capacity, for some men are specially 
adapted for that work; but it is equally desirable that an 
ample field should be left for those who prefer private initia- 
tive and activity. Our present system, much as it may need 
reform, offers opportunity for coordination of these two 
principles ; socialism would not. 

But it is as difficult to predict the ways in which socialism • 
would fail as it is for the socialists to say definitely how it 
would work, and this suggests their real weakness : they 
venture to forecast the course of economic evolution too far 
in advance. Certainly we must have ideals and look forward 
to the future, but we are unable to say very long before- 
hand what will be the best means of attaining these ideals. 
The hope that a juster distribution of wealth will prevail, 
and that income will represent more and more fully social 
service, is cherished by many who do not call themselves 
socialists, and who believe it wise to concentrate their efforts 
on practicable social reform. 

Our Debt to Socialists. — Socialists have rendered society 
a real service by calling attention to pressing social problems ; 
by forcing us to reflect upon the condition of the less fortu- 
nate classes ; by quickening our consciences ; by helping us 
to form the habit, not yet generally acquired, of looking at 
all questions from the standpoint of public welfare and not 
merely from that of individual gain ; and finally, by calling 
our attention to the industrial functions of government, 
thus leading us and aiding us to separate rationally the sphere 
of private industry from that of public business. 

Socialism not Anarchism. — Socialism has been described 
as industrial democracy established and controlled by govern- 
ment. It is evident, therefore, that the socialist would give 
to government the greatest possible authority. At the op- 
posite extreme stands a proposed system which is strangely 



378 ELEMENTARY PRINCIPLES OF ECONOMICS 

enough often confused by the ignorant with socialism. 
Anarchism would do away with government entirely, leaving 
all activity to individuals acting voluntarily; socialism, as we 
have seen, would lessen the sphere of individual initiative, 
leaving the greater part of industrial activity in the hands of 
government. In the main, therefore, anarchism and sociaHsm 
are antithetical. Yet there are some anarchists who believe 
that, were governments abolished, individuals would freely 
of their own accord form cooperative groups which, federated, 
would manage all production. Anarchy is, in the minds of 
most thinking people, inconceivable. 

Communism, Socialism, and Collectivism. — Communism 
is a term which is not much used in recent writing. In the 
past it was employed to designate an extreme kind of 
socialism. Communism required equality of possessions 
and of income, without much regard to the matter of the 
regulation of production. Some writers have used the word 
" communism " to designate violent schemes of radical 
social reforms as distinguished from the more peaceful and 
conservative plans of reconstruction, which they intend by 
the name socialism. Yet the communistic societies in the 
United States are composed of peace men, who do not believe 
in war, and even preach nonresistance to aggression. It is 
as well, perhaps, to abandon the attempt to make a perma- 
nent distinction between communism and socialism, by 
simply discarding the word "communism." Collectivism is 
a name which many socialists of recent years have favored 
as a designation of their program. Sometimes they have 
chosen the term in order to escape the odium which in past 
years has been attached to the older word. 

Divisions among Socialists. — Socialism is not only a 
theory of society, but also a practical program. Socialists 
are far from being of one mind as to what ought to be done 



SOCIALISM 379 

to bring about socialism. A small minority of them believe 
that the advocacy of socialism through the medium of the 
written and spoken word is sufficient. To that group belong 
many of the Christian Socialists, who base their argument 
and their hope upon the Christian Gospel. Another minor- 
ity, probably somewhat larger than the former, while holding 
that sociahsts should actively participate in politics, favor 
action through any progressive party, especially if it is a 
labor party. Such are the Fabian Socialists in England, 
who have adopted as their rule of action " Make Haste 
Slowly." But the preponderant majority of socialists 
believe that socialists ought always to form a distinctive 
party of their own with a clear-cut socialist program. 

Yet even among the political socialists there has arisen, 
during the past fifteen years, a strong divergence of opinion. 
The more radical of them minimize the importance of imme- 
diate betterment of the condition of the wage earner, and 
look to the enactment of the full socialist program as 
being by far the most important aim worth striving for, even 
though it might not be achieved for many years to come. 
These socialists designate themselves as Marxists, or 
Scientific Socialists, and are more or less literal followers of 
Karl Marx, who in his large work, Capital, tried to show that 
socialism is destined to arrive in its time, through the evolu- 
tion of the great underlying forces in industrial society, 
namely, the concentration of capital in a few hands and the 
growing misery of the working class under the capitalist 
system. The other faction, the Revisionists, question the 
correctness of the Marxian forecast and prefer to work for 
legislation which will immediately improve the lot of the 
workingmen. Notwithstanding their differences. Revi- 
sionists and Marxists cooperate in the same political party, 
which generally, but notably in Germany, is known as the 



380 ELEMENTARY PRINCIPLES OF ECONOMICS 

Social Democratic Party, and its followers as Social Demo- 
crats. Perhaps the larger part of political socialists in 
Europe and America are still Marxists. 

In opposition to both brands of political socialism, espe- 
cially the Revisionists, we find the French Syndicalists, who 
maintain that no political party is capable of keeping out 
corruption from its midst, who believe in the " war -of the 
classes " and the "general strike," and who would commit the 
ownership and control of each industry to the workingmen 
organized in syndicates or trade unions, and loosely bound 
together in the C. G. T. (the " Confederation Generale du 
Travail ")• Syndicalism has within recent years spread 
rapidly to other countries. In the United States, it is repre- 
sented by the so-called " I.W.W.," i.e. Industrial Workers 
of the World. 

As socialism depends for its success upon arousing the 
emotions of the masses of the people, it meets formidable 
rivals in both nationalism and imperialism, which make 
their appeal to another set of powerful emotions that sway 
the modern man, namely, the desire to lift one's nation above 
the others in power and in the sphere of its dominion. 

Present Status of the Socialist Political Movement. — 
Socialism as a general political movement has been making 
rapid strides in Europe within the last few years. It is 
impossible to form an accurate estimate of the aggregate 
number of political socialists at the present time, but certain 
figures are available which indicate the quick growth and 
present -status of the party. Thus in the German Empire 
the number of votes cast for socialist candidates for the 
Reichstag rose in the sixteen years, 1887 to 1903, from 763,128 
to 3,011,114. This represents a change from 10.1 per cent 
to 31.7 per cent of the entire vote of the Empire. In 1912 
the figure was 34.9 per cent, the total of votes was 4,250,329, 



SOCIALISM 381 

and, though the actual number of Social Democratic mem- 
bers of the Reichstag was only 110, it should on the basis 
of votes cast have been 131. Ninety-three newspapers, 
with a circulation of 1,800,000, belonged to the party in 1914. 
In Italy, in 1913, 53 " regular " socialists were elected to 
Parliament by 825,000 votes ; in Austria, in 1911, there were 
82 socialist members of the Lower House, elected by over a 
million votes ; and in Vienna alone, 20 of the 33 representa- 
tives were socialists. In France, in the election of 1914, 102 
socialist deputies were elected, and the total socialist vote 
was slightly below 1,400,000 ; but the fact that M. Millerand, 
a socialist, found a place in the Cabinet formed in 1901, and 
that M. Briand, another former socialist, became Prime 
Minister subsequently, to be followed at a later date by M. 
Viviani, is perhaps more significant than many figures. In 
England, where large p^^rties have always been few in number, 
socialism has shown a tendency to avoid the ordinary political 
channels. The same is true of the United States, although 
in recent elections surprising gains have been made by organ- 
ized socialists. In 1912 the total socialist vote for Presi- 
dent was about 900,000; but in 1916 the socialist vote for 
President exceeded 600,000 only slightly. A conservative 
estimate of the total socialist vote of the world would place 
it probably in the neighborhood of 10,000,000. We should 
not overlook the fact that many who vote for socialist candi- 
dates do so, not because they are socialists, but because 
they desire to express in a most telling way their discontent 
with existing governments. That particularly applies to 
Germany. 

SUMMARY 

1. Socialism is coercive cooperation in production. 

2. Socialists would permit private property in income, but not in 

means of production. 



382 ELEMENTARY PRINCIPLES OF ECONOMICS 

3. Socialists claim that labor produces aU wealtli, and they aim 

at a distribution based on justice. 

4. Socialism is but an extension of existing institutions. 

5. The strength of socialism lies in its suggested saving of waste, 

in its proposal for a juster distribution, and in its demand 
for the recognition of the social obligations of wealth. 

6. Its weakness lies in its requirement of impossible human virtues. 

7. Anarchism is really the opposite of socialism. 

8. There are many differences of view among socialists, these 

differences giving rise to distinct names for the different 
groups. 

9. The political socialists have increased rapidly in number in 

Europe during recent years. 

QUESTIONS FOR RECITATION 

1. Define socialism; anarchism. What is Christian socialism? 

Evolutionary socialism? Fabian socialism? 

2. How far does socialism abolish private property ? 

3. What effect would socialism, if successful, have on production? 

On distribution? On exchange? On consumption? 

4. What difficulties stand in the way of realization of socialism ? 

5. Why is it not right to say of every public interference in industry 

that it is socialistic? When may a measure be called social- 
istic ? 

6. What is the origin of wealth according to socialists? Discuss 

this claim. 

7. Why is anarchism not feasible? 

QUESTIONS FOR STUDY AND DISCUSSION 

1. Consider carefully possible answers to the question, commonly 

directed against socialism : Who would do the "dirty work" ? 

2. Discuss the argument for and against the use of diamonds. 

3. Discuss the possible bearings of socialism on the growth of 

population. 

4. Would universal education to the twentieth year of age be 

socialism? Would it bring about equahty of income? 

5. Would abolition of the right of inheritance be socialism? 

6. Can society work toward equality of income without "taking 

from those who have"? 

7. Is it socially and politically desirable that there should be a 

closer approach to equality of income than is the case to-day ? 
Would there be an economic gain? 



SOCIALISM 383 

8. What constitutional changes would be required for the in- 

troduction of socialism in the United States? 

9. Study conditions in your own neighborhood and consider whether 

or not, as to wage-earners and others, they correspond to the 
allegations of the socialists. 

10. Name prominent poets and novelists and politicians who belong 

to one or another of the soeiaUst schools. 

LITERATURE 

Brooks, J. G. : The Social Unrest, Ch. VIIT. 

Ely, R. T. : Property and Contract in their Relations to the Distribu- 
tion of Wealth, especially Vol. II, Appendix III, pp. 823-852, 
Production, Present and Futu]*e, by Dr. W. I. King ; and also 
Socialism and Social Reform. 

Enson, E. C. K. : Modern Socialism. 

Kirkup, E. : Inquiry into Socialism, and History of Socialism. 

Marx, Karl : Capital. 

Mill, J. S. : Principles of Political Economy, Bk. II, Ch. I, §§2, 3, 
and 4. 

Morley, H. (Editor) : Ideal Commonwealths. 

Rae, J. : Contemporary Socialism. 

Spargo, John : Karl Marx, his Life and Work ; also numerous 
other books and pamphlets. 

WaUing, William English : Socialism as It Is, Progressivism and 
After, and also Socialism of Today. 

Arguments against Socialism are found in nearly all standard eco- 
nomic treatises, e.g. those by Marshall, Taussig, Seager, 
Seligman. 



BOOK W 

PUBLIC FINANCE 

CHAPTER I 

EXPENDITURE AND REVENUE 

Definition of Public Finance. — Public finance is the 
science, or the branch of economics, ivhich deals with the rev- 
enues and expenditures of government, and with their ad- 
ministration. The name must be carefully distinguished 
from private finance, which deals with the revenues and 
expenditures of an individual or a private business, and from 
corporation finaiice, which deals with the revenues and 
expenditures of private corporations. The student is also 
cautioned against referring the word, as is often mistakenly 
done, to the subjects of money and banking, which belong to 
another part of economics. 

Early treatises in Enghsh economics usually had no special 
part devoted to public finance, but included some observa- 
tions on taxation in the treatment of other general topics. 
It is true that the difficulty of saying anything satisfactory 
about a subject so vast, within the scope of a few pages, is 
a serious one ; yet it does not seem scientifically satisfactory 
to pass over one of the most important economic topics, 
even in an elementary treatise. We shall therefore attempt 

384 



EXPENDITURE AND REVENUE 385 

to give some impression as to the nature and scope of public 
finance, while reminding the student that later and more 
careful study of the subject should be carried on with the 
help of some regular textbook entirely devoted to it. 

The Magnitude and Influence of Public Business. — 
Government business is the largest single business in every 
great nation. So vast and so permeating is it that it affects 
vitally all other businesses. If our government should have 
a large surplus every year, and should keep it out of circula- 
tion, we should shortly have a stringency in the money market 
that would result in a terrible panic. Still another feature of 
government business has an important bearing on all pri- 
vate business : government to-day is the largest single em- 
ployer of labor, and hence profoundly influences the condi- 
tions of employment elsewhere. 

The Magnitude of Public Expenditure. — The importance 
of public finance becomes more apparent when we consider 
the magnitude of government expenditures in modern times. 
The fact has often been cited that England's expenditure 
increased forty-fold between 1685 and 1841, while her 
population was increasing only threefold ; but this is only 
one of many equally significant facts. The annual national 
expenditure of Great Britain, after a slight decrease fol- 
lowing the Napoleonic wars, has increased quite regularly 
since, rising from about $235,000,000 in 1833 to nearly 
$1,000,000,000 in 1913-14, just before the outbreak of the 
European War. 

The French budget, — the name applied to the detailed 
statement of revenues and expenditures — showed expenditures 
of a thousand million francs, or about $200,000,000, in 1821 
for the first time, and the result was widespread alarm ; yet 
no French budget since that time has called for smaller 
expenditure, and in 1913 the total annual expenditure of 
2c 



386 ELEMENTARY PRINCIPLES OF ECONOMICS 

France and her minor governmental divisions amounted to 
more than five times the figure of 1821. 

Growth of Expenditure in the United States. — The fol- 
lowing table shows a similar increase in the Federal expen- 
ditures of the United States down to 1914, since which year 
the increase has been even more rapid for reasons growing 
out of the great war : — 

Federal Expenditures of the United States 

(Exclusive of "premiums," postal service,- Panama Canal, and 
principal of public debt) 



Yeab 


Ordinaht Expendi- 
tures 


Interest 


Total 


Per 
Capita 


1792 


% 5,896,000 


$ 2,373,000 


% 8,269,000 


$2.04 


1800 


7,411,000 


3,402,000 


10,813,000 


1.17 


1820 


13,134,000 


5,151,000 


18,285,000 


1.90 


1840 


24,139,000 


174,000 


24,313,000 


1.42 


1860 


60,056,000 


3,144,000 


63,200,000 


2.01 


1870 


164,421,000 


129,235,000 


293,656,000 


7.61 


1880 


169,090,000 


95,757,000 


264,847,000 


5.28 


1890 


261,637,000 


36,099,000 


297,736,000 


4.75 


1900 


447,553,000 


40,160,000 


487,713,000 


6.39 


1910 


638,450,000 


21,275,000 


659,705,000 


7.30 


1914 


677,390,000 


22,683,000 


700,253,000 


7.07 



Causes of Growth. — It must not be thought that this 
great increase in public expenditures is due to recklessness or 
dishonesty. Probably, on the whole, government has im- 
proved" during the last century ; and it is significant that 
where government is most undoubtedly honest, there have 
been larger increases than in many other quarters. The 
explanation of the increase is not difiicult. In the first place, 
we must remember that population has been increasing more 
rapidly than ever before, and that increase in aggregate 



EXPENDITURE AND REVENUE 387 

expenditure does not mean a proportionate increase in the 
burden borne by individuals. Other causes are the drift 
toward the city, the greater density of population, the general 
increase of wealth, higher standards of living, and higher 
price levels. The increase of government expenditure is 
less startling when compared with the growth of national 
wealth-capita. Besides this, we must conclude that govern- 
ment activity, while wiser than before, is also more extensive 
and important. Public schools, provision for public health, 
public parks, public baths, public libraries, all show the 
greatly increased range of state activity in modern times. 
With some unfortunate exceptions these increased expendi- 
tures are a sign of health, and do not indicate any tendency 
on the part of government to absorb an undue proportion 
of the industrial life of the nation. 

This can hardly be said, however, of the great increase 
in expenditure for pensions and for military and naval equip- 
ment. Whether these expenditures have been wisely or un- 
wisely made, it is at least regrettable that considerably 
more than 70 per cent of the regular Federal expenditures 
are due to past wars and to the preparation for war. The 
burden of this expenditure alone amounted in 1910 to about 
$439,781,000, or an average of about $4.70 for every man, 
woman, and child in the United States. This represented 
about $24 a year for every family of five. Laws passed in 
1915 and 1916 still further increased the per capita expense 
attributable to war. 

Classification of Public Expenditures. — So numerous are 
the objects of governmental expenditure that it is manifestly 
impossible to treat the subject exhaustively within the limits 
of our space. We must content ourselves here with a con- 
sideration of some of the more important classes into which 
such expenditures fall. 



388 ELEMENTARY PRINCIPLES OF ECONOMICS 

1. Expenditures for Fulfilling the Protective Functions of 
the State. — Of the general class of expenditures incurred 
in fulfilling the protective function of the state, the first 
to be mentioned are those (a) for security from foes ivithout 
the state. Under this head falls the cost of the army and 
navy. The direct cost of national defense includes the pay 
and equipment of troops, and the cost of ships, cannon, 
ammunition, etc. The indirect cost is represented by the 
pension list, as well as by the great waste of resources and 
opportunities for labor in times of war. 

(5) Internal Security. — Under expenditures for internal 
security are included the cost of our police system in all its 
branches, — including constables, sheriffs, etc., — and that 
of our judiciary system, since both of these are occupied 
almost wholly in securing persons and property from injury, 

(c) Expenditures for the Poor and Unfortunate. — Every 
civilized government recognizes an obligation to extend 
relief to paupers, to the deaf, the blind, the insane, and the 
feeble-minded, who, from natural defects, are unable to 
hold their own in the struggle for existence. 

2. Expenditures for FidfiUing the Commercial Functions. — 
A second general class of expenditures consists of those 
w^hich are incurred in fulfilling the commercial functions of 
the state. Among these are expenditures (a) for the con- 
struction and maintenance of such agencies as roads, bridges, 
canals, and rivenvays, improved harbors, lighthouses, etc. 
(b) The post-office and telegraph and railway lines are also 
commercial as well as educational in their purpose, but they 
are generally managed as self-sustaining or remunerative 
investments, even when they are under the ownership and 
management of the state. A similar expenditm-e for com- 
merce is that (c) for maintaining a currency and systems of 
weights and measures, (d) Expenditure for the consular 



EXPENDITURE AND REVENUE 389 

service also falls under the same general head. To a less 
degree the same may be said of the diplomatic service, though 
in this case the purpose of the service is perhaps primarily 
for maintaining international peace. 

3. Expenditures for Fulfilling the Developmental Functions. 
— The third general class of expenditures consists of those 
incurred in fulfilling the developmental function of the 
state. Most important among these is (a) the expenditure 
for education. Of all classes of expenditure that for educa- 
tion has grown most constantly and rapidly in the modern 
state. Under the head of education fall not only the educa- 
tion of the schools, but also that which is to be gained from 
art galleries and museums and other agencies for the promo- 
tion of culture. 

Other expenditures falling in the same general class are 
those for (6) public recreation, for (c) investigation, for {d) 
maintaining equitable conditions for private business, for (e) 
agricultural development, and for (/) public health service. 

4. Expenditures for the Maintenance of Government. — 
The expenditures we have been considering are, of course, 
expenditures by government: we have now to mention a 
fourth general class, — the expenditures for government ; 
that is, expenditures for governmental functions too general 
and fundamental to be ranged under any of the heads that 
we have before mentioned, corresponding to the so-called 
" overhead " costs of a private business. Such are the 
expenditures for {a) legislation and administration, and for 
(6) tax collection. 

Objects of Public Expenditure in the United States. — 
It is not customary for governments to classify their ex- 
penditures as we have here classified them, or in any such 
way as will show accurately just what the government pays 
for the objects which we have discussed. But a careful 



390 ELEMENTARY PRINCIPLES OF ECONOMICS 

study of Federal, state, and local expenditures will show that 
the greater part of the Federal expenditure is for the protec- 
tive and commercial functions, while the greater part of the 
expense of the developmental functions rests upon the 
state and local governments. Considering the aggregate ex- 
penditures of all the divisions of government, we find that 
they are roughly divided as follows : for the protective func- 
tions, about 45 per cent; for the developmental functions, 
about 30 per cent; for the commercial functions, about 15 
per cent; and for the expenses of government itself, about 
10 per cent. 

It is also interesting to note the relative growth of ex- 
penditure in the different political divisions of the govern- 
ment. Not only in the United States, but also quite gener- 
ally throughout the civilized world an increasing proportion 
of the aggregate expenditure is being made by the local 
governments, from which it appears that the greatest in- 
crease in governmental activity occurs where government is 
most directly and closely watched and administered by the 
people themselves. In the United States, until the last 
few years, the expenditures of the state governments have, 
as a rule, diminished in importance relatively both to Federal 
and local expenditures, and this fact has generally been held 
to indicate growing nationalization as well as growing govern- 
mental activity ; but within recent years the state expendi- 
tures have grown rapidly, showing that the states are 
increasing in social and economic significance. 

Classification of Public Revenues. — Differing classifica- 
tions of public revenue have been almost as numerous as 
the writers who have made them. Without entering into a 
discussion of the reasons for such differences, we may pre- 
sent at once a classification which is in general harmony 
with the usual treatment of the subject. 



EXPENDITURE AND REVENUE 391 

A. Permanent Revenues. 
I. Regular revenues. 

1. Derived directly from government ownership. 

a. Revenues from public domains. 

b. Revenues from public industries. 

2. Derived from the incomes of private persons and 
corporations. 

a. Fees. 

b. Special assessments. 

c. Taxes. 

II. Irregular and miscellaneous. Fines, forfeits, escheats, 
gifts, indemnities, etc. 

B. Temporary Revenues. (To be repaid.) 
I. Public loans by the sale of bonds. 

II. Public loans by the issue of treasury notes. 

The subject of public revenue is a complicated one and can 
only be briefly outlined here. Of the above forms of revenue, 
only public loans, fees, special assessments, and taxes will be 
discussed. 

Public Loans. — Great national debts are comparatively 
new in the world's history. Indeed, their origin is as recent 
as the reign of William and Mary in England. During the 
nineteenth century they grew with threatening rapidity in 
nearly all the countries of the civilized world. Even before 
the great European war, grave doubts were entertained as to 
the ability of some of the European peoples to carry the bur- 
den of their debt. The war in its first year is calculated to 
have involved an extra expenditure of nearly $18,000,000,000 
by the nations involved, and by far the greater part of 
this expenditure was cared for by public loans. Before the 
close of the year 1915 the war had already resulted in a 
doubling of the pubUc debt of the belligerent nations. 



392 ELEMENTARY PRINCIPLES OF ECONOMICS 

Fees and Special Assessments. — Fees and special assess- 
ments closely resemble taxes, but they are of much less 
significance in the fiscal system. A fee is a " payment made 
to the state on the occasion of some specific service rendered 
by the state to the citizen, — the service, however, being non- 
commercial in character." The payment demanded for 
recording a deed or mortgage is a fee ; so, also, is any court 
charge, or a charge for a teacher's certificate, a marriage 
license, etc. A special assessment, which is even more 
like a regular tax, may be defined as "a compulsory con- 
tribution, levied in proportion to the special benefits derived, 
to defray the cost of a specific improvement to property, under- 
taken in the public interest." Thus American cities often 
provide for the paving of particular streets by laying part 
of the cost upon the entire municipality in the form of a tax, 
and placing the remainder of the burden, in the form of a 
special assessment, upon the owners of " abutting " properties 
in proportion to the value of such properties. In this 
way the entire city helps pay for the benefit conferred upon 
the city, while the people living on the street or owning 
business property there pay for the special benefit which 
the improvement has conferred upon them. The custom 
of municipal improvement by special assessment has been 
developed much farther in the United States than in 
Europe. 

Taxes. — The most important and most regular source of 
public revenues is taxation. Taxes are one-sided transfers 
of valuable things, exacted by public authority, chiefly from 
citizens, but also from other persons within its reach, according 
to some general rule, in order to meet public expenses and to 
accomplish other public ends. Taxes differ from fees and 
special assessments, therefore, chiefly in that there is no 
attempt to proportion the tax to the benefit conferred upon 



EXPENDITURE AND REVENUE 393 

the individual. The justification of taxation lies simply 
in the necessity of maintaining the state. If the people 
are to have a state they must pay for it, and no better means 
than taxation has yet been discovered. 

What is a Just Tax ? — No question regarding taxation 
has been more earnestly discussed than the question of 
what constitutes justice in taxation. One answer that is 
commonly heard is that taxes should be proportioned (1) to 
benefits derived. But it is utterly impracticable to attempt 
to say what proportion of the general benefits of government 
accrue to particular individuals. And even if this were 
practicable, it would probably be found in many cases that 
the greatest relative benefits are enjoyed by the weak and 
the poor, who are least able to bear the tax burden. 

The Faculty Theory. — A theory more generally accepted 
by economists to-day is that taxation (2) should be pro- 
portioned to "faculty," or ability to pay. But even when 
this rule has been accepted, there remains the difficult 
question, How is faculty to be measured ? One answer has 
been that we may measure ability by (a) consumption; but 
it is evident that the consumption of the poor is out of all 
proportion to their ability to bear the burdens of the state. 
Another suggested basis of measurement (6) is property; 
but property differs widely in its productiveness, and, more- 
over, many persons with little property have large incomes, 
and therefore great ability to bear taxation. Perhaps the 
least objectionable measure of ability is afforded (c) by m- 
co7ne, though even here we must note that incomes differ 
in permanence and security, and that equal incomes are 
called upon to support very unequal numbers of persons. It 
is not possible to reach a single perfectly just basis of ap- 
portionment of the tax burden ; but the levying of taxes on 
income, with variations to correct manifest cases of in- 



394 ELEMENTARY PRINCIPLES OF ECONOMICS 

equity, probably approaches as near to ideal taxation as is 
possible to-day. 

Granting this, another question at once presents itself 
for solution. Shall taxes be laid in direct proportion to 
income, or shall the rate be increased as the amount of in- 
come increases? The first method is called (a) proportional 
taxation; the second, (6) progressive or graduated. Some- 
times taxes are neither proportional nor progressive, but 
(c) regressive; that is, the rate diminishes as the taxed property 
or income becomes larger. Such taxes every one admits to 
be unjust, though many such taxes are levied. The opinion 
of students everywhere seems on the whole tending to favor 
progressive rates. 

Direct and Indirect Taxes. — In concluding our discussion 
there remains to be noted a distinction, frequently seen in 
economic writings, between direct and indirect taxation. 
The meaning attributed to these terms at different times and 
by different writers has varied widely, but a common defini- 
tion is that direct taxes are taxes laid by the state upon those 
who are expected to bear the burden of them, while indirect 
taxes are expected to be shifted to other persons. 

Poll taxes, property taxes, income and inheritance taxes 
are usually called direct, while customs taxes and excise taxes 
are called indirect. The importer of goods subject to duty 
pays the tax, but recoups himself from the enhanced price 
which he is able to charge the consumer of the goods. 

As taxation is the most important single subject in the 
domain"-of public finance, we shall present a more detailed 
treatment in the following chapter, in connection with the 
topic Revenues in the United States. 

The Single Tax. — Many intelligent citizens' of England, 
the United States, and other countries are adherents and 
devoted advocates of a scheme for entirely abolishing taxa- 



EXPENDITURE AND REVENUE 395 

tion, as that word is ordinarily understood. Mr. Henry 
George, author of Progress and Poverty, a man of wonderfully 
earnest human sympathies, and of very strong and sincere 
convictions, gave the latter part of his life to the advocacy 
of the plan, which he himself did most to formulate and 
popularize in modern times. We can do no better, there- 
fore, than to explain the proposed system in Mr. George's 
own words, as printed in his paper, the Standard: — 

" The Standard advocates the abolition of all taxes upon 
industry and the products of industry, and the taking, by 
taxation upon land values, irrespective of improvements, of 
the annual rental value of all those various forms of natural 
opportunities embraced under the general term. Land. 

" We hold that to tax labor or its products is to discourage 
industry. We hold that to tax land values to their full 
amount will render it impossible for any man to exact from 
others a price for the privilege of using those bounties of 
nature in which all living men have an equal right of use ; 
that it will compel every individual controlling natural 
opportunities to utilize them by employment of labor or 
abandon them to others ; that it will thus provide opportu- 
nities of work for all men, and secure to each the full reward 
of his labor ; and that as a result involuntary poverty will 
be abolished, and the greed, intemperance, and vice that 
spring from poverty and the dread of poverty will be swept 
away." 

The proposition is here definitely made that the state 
should take all of the pure or economic rent of land, and 
the claim is made in explanation and justification of the 
policy that it will abolish poverty. Such a policy might, 
indeed, prevent landowners who do not care to use their 
land from keeping it out of the hands of those who would use 
it; but how it would effect all the other predicted blessings 



396 ELEMENTARY PRINCIPLES OF ECONOMICS 

is difficult for most people to comprehend. In the first 
place, there are, no doubt, administrative difficulties in 
the way of separating the pure economic rent of land from 
the annual value of the separable improvements on the land. 
But apart from this difficulty, the appropriation of economic 
rent by the public without compensation to the owners does 
not appeal to the conscience of the American public as a just 
thing to do. No abstract reasoning, based on " natural 
rights," will persuade a modern nation to so radical a step. 
This honestly and earnestly advocated policy is only one 
more illustration of the danger of basing social reasoning 
on any theory of " natural rights." 

Some advocates of the higher taxation of land values, 
recognizing the unwisdom or injustice of appropriating all 
rents now existing, propose instead that the state shall 
take, under the form of taxation, all future increments in 
ground rents which increasing population may create. 
England, Germany, and some Canadian cities may be said 
to have moved in this direction within recent years, by lay- 
ing a special tax on increases in urban rents ; but probably 
in no country in the world is a greater proportion of incre- 
ment in land values taken for public purposes than in those 
states of the American Union where land is taxed according 
to selling value, and where also the land owners pay for im- 
provements, either wholly or in large part. This is the 
ease, for example, in Wisconsin. It frequently happens 
in American cities that taxes and special assessments take 
far more than the increment in values and leave the owner 
with the unearned decrements. 

One argument in favor of the special tax on urban land is 
that in cities it is easy to separate economic rent from the 
earnings of improvements, such as buildings. In fact, as 
has been stated elsewhere in these pages, such a separation 



EXPENDITURE AND REVENUE 397 

is frequently made. Even here, however, it is well to pro- 
ceed very cautiously. Confiscation, at any rate, should 
not be tolerated. If great and expensive changes along this 
line should commend themselves to the people, the burden of 
the changes should be widely diffused throughout the com- 
munity by means of inheritance and other taxes. 

SUMMARY 

1. Public finance treats of the revenues and expenditures of gov- 

ernment. 

2. Government business is everywhere the largest single business, 

and profoundly influences all private business. 

3. Public expenditure in civilized states has been rapidly increas- 

ing, owing both to the rapid increase in population and to 
the widened scope of government activity. 

4. Public expenditures are for fulfilling the protective, the com- 

mercial, the developmental, and the self-sustaining functions 
of government. 

5. Public revenues are derived from public domains and industries, 

from fees, special assessments, and taxes, from fines, gifts, 
etc., and from public loans. 

6. Taxes, the chief source of revenue, are compulsory payments 

for government expenses. 

7. A just tax is one which conforms to the ability of the taxpayer 

to bear the burden. 

8. Direct taxes are intended to be borne by those paying them ; 

indirect taxes are designed to be shifted. 

9. The proposed plan of taking all the economic rent of agricul- 

tural land for the support of the state, is impracticable, and, 
unless compensation is provided for, is morally indefensible ; 
special taxation of urban rents, especially of future incre- 
ments of rent, stands on a different footing. 

QUESTIONS FOR RECITATION 

1. What is public finance ? From what is it to be distinguished ? 

2. What is the bearing of pubUc finance upon the labor problem ? 

3. Why have public expenditures so uniformly increased during the 

last century? 

4. Classify public expenditures, and name particular expenditures 

falling under each group. 



398 ELEMENTARY PRINCIPLES OF ECONOMICS 

5. What classes of expenditure have shown the most rapid increase 

in the last century ? 

6. What are fees? Special assessments? Taxes? What are the 

differences among them ? 

7. How do revenues from loans differ from other revenues? 

8. What is the justification of taxation? What are the theories 

regarding just taxation? 

9. What are some of the different proposals made by Single Taxers? 

What is the difference between them? Discuss the justice 
and practicability of these proposals. 

QUESTIONS FOR STUDY AND DISCUSSION 

1. Study th® financial report of your own town or city, and of 

your own state. What are their sources of revenue? their 
objects of expenditure? 

2. Why are poll taxes regressive ? 

3. How far do the debts of the world represent reproductive in- 

vestment ? 

4. Name some proportional, progressive, and regressive taxes in 

the United States to-day. 
6. Study carefully the claims of the proponents and opponents of 
the single tax. 

LITERATURE 

Adams, H. C. : The Science of Finance, §§ 10, 18, and 49, and 

Public Debts. 
Bastable, C. F. : Public Finance. 
Daniels, W. M. : The Elements of Public Finance, pp. 30-33 and 

pp. 36-38. 
Ely, R. T. : Property and Contract (for a discussion of the single 

tax, consult references in the index). 
Fillebrown, C. B. : The ABC of Taxation. (A presentation of the 

single tax theory.) 
George, H. : Progress and Poverty. 
Plehn, C. C. : Introduction to Public Finance. 
SeUgman, E. R. A. : Essays in Taxation. 
Shearman, Thomas G. ; Natural Taxation. 



CHAPTER II 

REVENUES IN THE UNITED STATES 

I. Federal Revenues 

The following table shows the Federal revenue classijBed 
by sources for the fiscal year ending June 30, 1914 : — 

Customs $292,320,015 

Internal revenue 380,041,007 

Postal service 287,934,566 

Miscellaneous : 

Profits on coinage, buUion deposits, 

and assays $6,182,560 

Sales of pubHc lands 2,571,775 

Fees : consular, letters patent, etc. 5,774,104 
Tax on National banks .... 3,883,198 
Forest reserve fund ..... 2,486,901 

Immigration fund 5,216,150 

Other miseeUaneous 36,197,457 

62,312,145 

Public-debt receipts 23,021,222 

Total revenue $1,045,628,955 

Customs Taxes. — As appears in the table, the govern- 
ment derives a very large proportion of its whole revenue 
from customs duties, which are taxes laid upon imported 
commodities. In earlier days, and particularly before the 
Civil War, the customs duties constituted nearly the whole 
of the Federal revenues ; and even now, in times of peace, 
not far from one third of the ordinary tax receipts of the 
national government are from this source. 

399 



400 ELEMENTARY PRINCIPLES OF ECONOMICS 

Custom duties are either specific or ad valorem. Specific 
duties are duties laid in proportion to loeight or number, with- 
out regard to value, while ad valorem duties are levied in 
proportion to the value of the commodities imported. Ad 
valorem duties are open to the objection that they offer a 
greater temptation to fraudulent valuations, and hence make 
more difficult the work of the customs ofiicers. Specific 
duties, on the other hand, while they can be more easily ad- 
ministered, are open to the serious objection that they im- 
pose a relatively heavier burden upon less valuable goods 
of any class. 

Although long use and practical convenience have given 
the customs duties a large and apparently secure place in 
our financial system, there are certain evident objections to 
such taxation which must be borne in mind by the student in 
considering the general question of tax reform. These 
objections call for explanation. 

Objections to Customs Duties. — 1. Their Regressive 
Character. — First of all, it is an objection against such taxes 
that they are regressive in character. Customs duties, to 
yield a large revenue, must be levied upon goods of very 
general consumption, and moreover fiscal reasons lead to the 
imposition of high rates upon such commodities. But it is 
for precisely such commodities that people of only moderate 
incomes spend a greater proportion of their income than do 
the rich. Therefore the tax is regressive; it lays a dis- 
proportionate burden upon the poor people and people of 
moderate means. 

2. Effect upon Industry. — In the second place, such taxes, 
if they are " protective " in character, seem to interfere 
with what may be regarded as the " natural " disposition 
of the nation's labor and capital. Moreover, it regularly 
happens that such a tariff takes much more from consumers 



REVENUES IN THE UNITED STATES 401 

than ever finds its way into the Federal treasury, since 
only imported goods yield a revenue, while all goods, im- 
ported and domestic, are sold at a higher price to the con- 
sumer. If the tax be not protective, then, to meet the re- 
quirements of the revenue, goods must be brought in at 
certain ports or made in certain ways, so that customs and 
excise officials can inspect and see that the state is not de- 
frauded ; and, even with the system of bonding, — where 
commodities are placed in bonded warehouses, from which 
they are only removed and pay the tax when they are about 
to be sold, — some interval must elapse between the payment 
and its recovery in the price charged to the consumer, and 
some interest must be lost on the capital locked up for that 
period. 

3. Inelasticity. — ■ The two objections just explained are 
based chiefly upon social and industrial considerations. A 
third objection is directly financial in its nature. One mark 
of a good tax is its elasticity. Now few taxes are more in- 
elastic than customs duties. Frequent changes of tariff 
rates are fatal to that stability of industrial conditions with- 
out which business cannot prosper. Unusual demands upon 
the Federal purse cannot be met by changes in the tariff 
schedules. . 

4. Uncertainty. — And hence results still a fourth ob- 
jection, also financial in character. It is a serious defect of 
such taxes that they are likely to yield least when govern- 
ment need is greatest. A war, calling for unusual expendi- 
tures, is. certain to curtail international trade and hence 
revenues from customs duties. Moreover, recurrent in- 
dustrial depressions affect most seriously the government's 
receipts from this source. 

Excise Taxes. — Excise duties or taxes are those levied 
directly upon certain classes of goods produced within the 
2d 



402 ELEMENTARY PRINCIPLES OF ECONOMICS 

country. These taxes are also known as Internal Revenue 
taxes. The method of collecting excise taxes has been de- 
veloped into a simple and effective system. Producers of 
tobacco, cigars, whiskey, etc., must purchase revenue stamps 
from the government and put these upon the packages con- 
taining the goods in such a way that opening the packages 
will destroy the stamps. 

Excise taxes are regularly classed with customs duties as 
indirect taxes, because, while they are laid directly upon 
producers, it is supposed that they will be shifted to con- 
sumers in the enhanced price of the commodity. In some 
other respects, too, excise taxes are open to the same ob- 
jections that lie against customs duties. They are regressive 
in character, though, as they are laid chiefly upon liquors and 
tobacco, the injustice of their regressive character is less 
grave. But, on the other hand, excise taxes have proved 
very productive, and they offer relatively little difficulty in 
collection. Moreover, they form a more reliable source of 
revenue than do customs duties, in that they fluctuate less 
in times of war and in periods of industrial depression. 

Mention has been made of the regressive character of 
customs duties and excise taxes. It must be remembered, 
however, that these taxes are only two features in modern 
systems of taxation. It is quite possible that taxes of these 
kinds may be balanced by income and property taxes resting 
more heavily upon the rich than upon the poor, so that the 
inequality of one kind will be offset by the inequality of a 
different kind. We have to consider in the United States 
not only the Federal taxes, but state and local taxes, before 
we can tell whether the taxes are just or unjust in the way 
they affect different classes in the community. 

Taxes on Transactions. — ■ In times of urgent need, as in 
the War of 1812, the Civil War, the war with Spain, and 



REVENUES IN THE UNITED STATES 403 

during the great European war, the Federal government has 
imposed taxes upon various sorts of transactions. Thus the 
Act of 1898 imposed "stamp" taxes on bank checks, tele- 
grams, freight and express receipts, transfers of stocks and 
bonds, bills of exchange, etc., the method of collecting the rev- 
enue being similar to that described in the case of excise taxes. 

Though such taxes may be made the source of large and 
easily collected revenue, they are not likely to be resorted 
to except in times of emergency, since their general effect 
is greatly to impede business ; and a check on business 
activity soon lessens the revenue from other sources. In 
most cases taxes on transactions are borne by the consumer or 
purchaser, though in some cases, if the tax be a small one, 
the producer or seller will " pocket the loss." 

The Federal Income Tax. — The United States now 
derives a substantial proportion of the Federal revenues 
from income taxation. This was made possible by the 
amendment to the Federal constitution adopted in 1913. 
Before that time, according to the interpretation of the 
constitution by the Supreme Court, an income tax that 
included a tax upon income derived from land, must, as 
being a direct tax, be apportioned among the states accord- 
ing to their population. But a tax so apportioned was too 
manifestly unjust to be considered. The constitutional 
amendment which made a fair Federal income tax possible 
was finally secured by the people after a generation of ex- 
cited and expensive agitation and effort. 

The present federal income tax law is incorporated in the 
Revenue Act of September 8, 1916. The Act distinguishes 
two classes of incomes, those of persons and those of corpora- 
tions. A tax of two per cent is laid upon the net incomes of 
corporations of nearly all kinds. The same " normal " tax 
of two per cent is laid upon all personal net incomes above 



404 ELEMENTARY PRINCIPLES OF ECONOMICS 

$3000 a year; but the head of a family, a married man 
living with his wife or a married woman living with her 
husband is entitled to an exemption of an additional $1000 
of income. This exemption cannot be claimed by both, and 
only $4000 of the aggregate income of man and wife can be 
exempt from taxation when they are living together. 

So much of personal income in excess of $3000 or $4000 
as is derived from the earnings of corporations, which pay 
the two per cent corporation tax, is also free from the normal 
personal income tax of two per cent. 

In addition to the normal tax of two per cent, personal 
net incomes above $20,000 pay a graded " supertax " or 
additional tax as follows : — 

Incomes Rate of Supertax 

S20,000- 40,000 1% 

40,000- 60,000 2% 

60,000- 80,000 3% 

80,000- 100,000 4% 

100,000- 150,000 5% 

150,000- 200,000 6% 

200,000- 250,000 7% 

250,000- 300,000 8% 

300,000- 500,000 9% 

500,000-1,000,000 10% 

1,000,000-1,500,000 11% 

1,500,000-2,000,000 12% 

2,000,000- 13% 

An illustration may aid the student in understanding the 
operation of the tax. Let us suppose the case of a married 
man having a net income of $1,000,000 a year obtained 
from earnings, bonds, mortgages, and similar investments. 
His income is taxed as shown in the accompanying table. 
The net tax rate on the whole income, obtained by dividing 
the whole tax by the whole income, would in this case 
equal 10,292 per cent. 



REVENUES IN THE UNITED STATES 405 

S4,000 exempt 

4,000- 20,000 at 2% S 320 

20,000- 40,000 at 3% 600 

40,000- 60,000 at 4% 800 

60,000- 80,000 at 5% 1,000 

80,000- 100,000 at 6% 1,200 

100,000- 150,000 at 7% 3,500 

150,000- 200,000 at 8% 4,000 

200,000- 250,000 at 9% ....... 4,500 

250,000- 300,000 at 10% 5,000 

300,000- 500,000 at 11% ■ 22,000 

500,000-1,000,000 at 12% 60,000 



Total tax $102,920 

In the first complete year of the operation of the law 1914- 
1915, 174,205 corporations paid a tax of $38,986,952, and 
357,515 individuals paid personal incomes taxes aggregating 
about $41,046,162. 

The numbers of personal incomes reported for different 
income classes during the first complete tax year are shown 
in the following table : — 

Net Annual Income Number Reported 

$500,000 and over 174 

250,000 to 500,000 346 

100,000 to 250,000 1,828 

75,000 to 100,000 1,501 

50,000 to 75,000 3,660 

20,000 to 50,000 23,348 

15,000 to 20,000 15,790 

10,000 to 15,000 34,141 

5,000 to 10,000 127,448 

4,000 to 5,000 66,525 

3,000 to 4,000 82,754 

It thus appears that about one-third of one per cent of 
the American people have annual incomes of $3000 or more a 
year. Apparently less than one per cent of the families 
are living on such incomes. 



406 ELEMENTARY PRINCIPLES OF ECONOMICS 

The Income Tax in Practice. — In considering the claim 
for and against income taxation, we are aided by the wide 
and varied experience of other nations in the use of this tax. 
First of all, it is to be noted that in Australasia, England, 
Italy, Germany, and other countries in which the income 
tax has been given a trial, (1) experience has justified this 
form of taxation, according to the majority opinion of those 
who have considered the matter. Moreover, it is especially 
noteworthy that income taxation (2) gains in economy and 
productiveness, and wins increasing approbation as the years 
go by. 

In the third place, (3) there is little question that an in- 
come tax, assuming it to be fairly enforceable, conforms al- 
most perfectly to the ideal of taxation, that men should pay the 
expenses of the state in proportion to their "faculty " or 
ability, since income is by all means the best single mark of 
such ability. Where the tax is applied uniformly upon 
all kinds of income, (4) it cannot be shifted easily, and the 
tax on rent and monopoly privileges of all sorts cannot be 
shifted at all. This itself is a strong recommendation of 
the tax. (5) Moreover, income taxation lends itself easily to 
the use of the principle of progression, by ivhich the regressive 
character of other taxes may be offset. 

Exemption. — It is usual, as in the present federal in- 
come tax, to exempt a certain minimum of income from 
taxation, for the reason that possessors of small and moderate 
incomes already pay a disproportionate share of other taxes, 
and for "the further very practical reason that the expense of 
collecting the tax on such incomes bears too high a propor- 
tion to the return to render such taxation economical. 

The Federal Inheritance Tax. — The Revenue Act of 
September 8, 1916, in addition to increasing the rates of 
the income tax, imposed an inheritance tax. During the 



REVENUES IN THE UNITED STATES 407 

Civil and Spanish-American wars we had short-hved Federal 
inheritance taxes, as emergency measures. Unlike those 
taxes, the present Federal inheritance tax law is designed to 
be a permanent feature of our revenue system. 

This tax is imposed upon the transfer of the entire net 
estate of every decedent, whether a resident or a non-resident 
of the United States. The " net estate " upon which the 
tax is imposed is the gross estate of the decedent, less deduc- 
tions for the expenses of administration, debts, and losses, 
and an exemption in all cases of $50,000, except in estates 
of non-residents. The rates are as follows : — 



Amount op " Net Estate " 

(Gross estate less permitted deduc- Tax Pek Cent 
tion and an exemption of $50,000) 

Up to $ 50,000 1 

50,000- 150,000 2 

150,000- 250,000 3 

250,000- 450,000 4 

450,000-1,000,000 5 

1,000,000-2,000,000 6 

2,000,000-3,000,000 7 

3,000,000-4,000,000 8 

4,000,000-5,000,000 9 

5,000,000 and up 10 



II. State Revenues 

We come next to taxation by the commonwealths, and in 
beginning it may be well to study the following table showing 
the revenues of New York State for the fiscal year ending 
September 30, 1913, as given in the report of the State Comp- 
troller for 1914 : — 



408 ELEMENTARY PRINCIPLES OF ECONOMICS 

Direct taxes $11,154,114.25 

Indirect taxes (a purely administrative classifica- 
tion, not to be regarded in the sense of the defini- 
tion given in the preceding chapter) 

Excise 9,280,681.65 

Corporations 10,910,529.13 

Organization of corporations . 455,512.50 

Inheritance tax 12,724,236.86 

Stock transfer 2,927,810.88 

Miscellaneous 4,083,019.81 

40,381,990.83 
Non resident taxes 50,434.18 

51,586,339.26 

Sales of public lands . 42,729.45 

Fees and other receipts of public officers .... 638,204.01 

Fines, fees, duties, etc 387,465.19 

Miscellaneous receipts from institutions .... 754,431.92 

Other receipts 1,716,790.96 

Total to general fund 55,125,960.79 

Receipts for special funds 37,654,068.69 

Total receipts into treasury from aU sources . . 92,780,029.48 

Poll Taxes. — One antiquated source of revenue which 
does not appear in the table is the poll tax. Many states 
levy poll or capitation taxes, to be paid into the state 
or local treasury. Poll taxes are taxes usually levied at a 
uniform rate upon practically all male citizens. They are 
difficult of collection, in the highest degree inequitable, and 
are gradually disappearing from the financial systems of 
advanced governments. 

General Property Tax. — The greater part of the revenue 
entered in the table under the name Direct State Taxes is 
from a general property tax, a tax which is lemed — in theory 
— iipon nearly all property, real and personal, on a uniform 
basis of assessment and at a uniform rate. The importance 
of this tax appears in the fact that revenue derived from it 
in the commonwealths of the United States constitutes 
more than one half of the state and local revenues, and nearly 



REVENUES IN THE UNITED STATES 409 

one third of the total revenues of the country, — national, 
state, and local. And yet all economists who have written 
upon the subject, and nearly all state officers who have to 
do with the administration of the tax, have not been able 
to speak of it otherwise than in terms of severe condemna- 
tion. Naturally, then, there is now a strong tendency to 
work away from this form of taxation. Some of the many 
serious faults which the general property tax has everywhere 
shown call for comment and explanation. 

Though the method of assessment and apportionment differs 
in many details among the states, it is the usual custom for 
assessors in each community to prepare complete statements 
of all or nearly all kinds of taxable property owned by the 
people of the community. In some states the assessors 
receive from all residents sworn " lists " of property owned 
and subject to tax. By the terms of the law, the property 
is supposed to be rated at its true, full value, though by the 
acknowledged practice of assessors and courts of review, the 
real rates vary widely from state to state, and even from 
community to community. On the basis of the property 
valuations thus made the state and local governments, — 
county and town, — levy direct taxes at a rate fixed from 
year to year according to the fiscal needs. The tax is then 
collected by" local officers, and of the whole amount the por- 
tion levied by the county and state is passed on to the des- 
ignated officers after each minor political division has set 
aside its share. 

1. Unjust Apportionment. — The first of the defects of 
the tax appears in the apportionment of the state's share of 
the tax. Each community has a narrow, selfish interest in 
reducing its valuation in order that it may escape its just 
share of the tax. In this sordid struggle of community 
against community, assessments are made to vary all the 



410 ELEMENTARY PRINCIPLES OF ECONOMICS 

way from 10 to 90 per cent of the true values. The same 
mean struggle is especially frequent between city and country 
districts. To correct the evil, state boards of equalization 
or state tax commissions have usually been appointed. 
Wisconsin seems to have succeeded better by this method 
in lessening the inequities of assessment in the general prop- 
erty tax system than any other state. 

2. Inequity as hetween Realty and Personalty. — In the 
second place, the general property tax has proved grossly 
inequitable in laying an undue proportion of its burden upon 
real property, allowing various forms of personal property 
to escape with a slight tax or with no tax at all. A secondary 
result of this inequity is that the rural districts bear a dis- 
proportionate burden, since the greater part of the tax-escap- 
ing personalty is owned by the wealthy citizens of our cities. 

3. Inequalities of City Assessments. — Very similar to the 
preceding evils is the further injustice wrought by the tax 
through the disproportionate assessment of the pieces of 
real estate in cities. Several state tax commissions have 
found and reported that in the case of city properties the 
proportion between the assessed value and the real value 
quite regularly varies inversely as the value of the property. 
Thus in one case it was found that some of the most valuable 
properties were assessed at only about one-tenth of the real 
value, while properties of little value were regularly assessed 
at from five to eight tenths of their value. This evil has 
been considerably lessened in recent years. 

4. Temptation to Dishonesty. — It follows from the evils 
already described that the general property tax leads to a 
shocking amount of dishonesty, perjury, bribery, and other 
forms of corruption. Indeed, as one writer has expressed 
it, " The general property tax has gone far toward making 
perjury respectable and even virtuous." 



REVENUES IN THE UNITED STATES 411 

Inasmuch as the general property tax has been condemned 
by nearly all students of finance and by financial administra- 
tors, we should all welcome the present tendency on the part 
of the states to turn to other forms of taxation. In several 
commonwealths the state governments have entirely or 
nearly abandoned the general property tax, leaving it 
chiefly to the smaller political divisions ; and other common- 
wealths are moving in the same direction. 

Corporation Taxes. — Partly owing to the proved injustice 
of the general property tax, but partly also owing to the 
recent great growth of the corporate form of business enter- 
prise, there has been in the last quarter of a century a con- 
siderable development along the line of taxation of corpora- 
tions. In some cases, as in New York, there are two taxes 
thus laid, one upon the organization of such corporations, 
and another upon their annual business. It has been found 
much easier to reach the revenues of such businesses directly 
than to reach them through the taxation of the stocks and 
bonds of the corporations in the hands of individual owners. 
New York, Pennsylvania, Vermont, Wisconsin, and Massa- 
chusetts are among the states that have come nearest to 
abandoning the general property tax, and developing in 
its stead taxation of corporations. 

License Taxes. — Another form of state taxation that 
has undergone a considerable development in recent years is 
that of business licenses. When, as is the case in our South- 
ern states, licenses are required for many different kinds of 
business, serious disturbance to business results. But 
much may be said in favor of a system of taxing by license 
a few industries which it is generally believed the state 
should regulate. The most important of such license taxes 
are those laid on the sale of liquor. The state of New 
York, which divides the proceeds from liquor licenses between 



412 ELEMENTARY PRINCIPLES OF ECONOMICS 

the state and the community, received $9,280,681.65 as 
its share of such revenue in the fiscal year 1913. 

Inheritance Taxation. — Still another form of taxation 
to which increasing resort has been had in recent years is 
that of inheritances, collateral and direct. In the levying of 
inheritance taxes, or " succession duties," there are many 
and wide differences of detail which we cannot stop to con- 
sider. In many cases such taxes are progressive or graduated 
on a twofold basis, according to remoteness of relationship 
and according to size of bequest. Thus, a small bequest 
to a wife or son or daughter would be taxed at the lowest 
rate, while the bequest of a large fortune to distant relatives 
or strangers in blood would bear the heaviest burden. This 
form of taxation is winning increasing favor from economists 
and from statesmen, both on account of its conformity to the 
" faculty " theory of taxation, and because of its practical 
ease and certainty of collection. The large part which the 
tax already plays in the finances of New York State is shown 
in the table. Thirty-nine commonwealths raise a part of 
their revenue from a tax on collateral inheritance, and of 
these states twenty-eight also tax direct inheritance. It 
is to be noted further that a majority of the states have 
adopted the principle of progression in levying the tax. 

III. Local Revenues 

Local areas of administration in the United States have 
usually relied in the main upon the same taxes which are 
levied by the state governments. Thus, as has been ex- 
plained above, the general property tax is levied at a rate 
which represents the contribution of the taxed property to 
town, county, and state governments. Similarly, the local 
governments are usually allowed a share of the revenue from 



REVENUES IN THE UNITED STATES 413 

liquor-license taxation. Municipalities also at times have 
their independent license system for hucksters, etc., though 
this system usually has for its main purpose the regulation 
of such business. 

Revenue from Franchises. — One form of revenue which 
American cities have been too prone to neglect is now re- 
ceiving increasing attention. Private municipal service 
corporations enjoy very valuable privileges under their 
municipal franchises, and they should be made to pay for 
these franchises all that they are worth ; that is, the capi- 
talization of their earning power, less the actual capital 
invested with an extra allowance for the regular risks of the 
business. Some cities have been able to manage such mu- 
nicipal enterprises for themselves with great profit, and it is 
not improbable that this method will be adopted more 
generally as American municipalities become more honest 
and businesslike. 

Receipts and Balances All Citibs 

Classified by source, as receipts from : 

General property taxes $570,830,861 

Special property taxes 12,598,628 

Poll and occupation taxes 1,792,358 

Business taxes . 52,348,721 

Non-business license taxes 4,402,375 

Special assessments 79,890,321 

Fines, forfeits and escheats 4,449,361 

Subventions and grants . 36,141,199 

Donations, gifts, and pension assessments . . . 3,753,720 

Earnings of general departments . . . . . . 22,547,201 

Highway privileges 15,069,314 

Rents of investment properties 11,286,954 

Interest 28,715,919 

Earnings of public service enterprises .... 96,558,379 

Water supply systems 77,465,508 

All other 19,092,871 

Total receipts, including non-revenue receipts and 

cash balances $2,381,103,700 



414 ELEMENTARY PRINCIPLES OF ECONOMICS 

Receipts and Balances All Cities 

The per capita receipts for the same year were as follows : 

All revenues 130.17 

Property taxes 18.72 

Other taxes 1.88 

Special assessments 2.56 

Fines, forfeits and escheats 0.14 

Subventions, grants, donations, gifts, and pension assess- 
ments 1.28 

Earnings of general departments 0.72 

Highway privileges, rents, and interest 1.77 

Earnings of public service enterprises 3.10 

The preceding table prepared from " The Financial Sta- 
tistics of Cities having a Population of over 30,000 : 1915," 
published by the Department of Commerce, shows the sources 
from which American cities of 30,000 inhabitants or over 
derived their revenues in 1915. 

IV. A Balanced Revenue System 

In what has gone before, we have not dwelt upon the 
question whether any forms of revenue are particularly 
appropriate to different divisions of our government, or 
whether there is any gain in a balanced system for the differ- 
ent governments considered together. A moment's re- 
flection should convince the student that no part of our 
revenue laws can be finally judged until it is considered in 
its relation to the whole system. To emphasize this fact, 
it may be well to suggest here a balanced revenue system, 
in which Federal, state, and local revenues will be placed in 
the right relation one to another. 

Federal Revenues. — In the first place, it is to be noted 
that the Federal Constitution itself prescribes the place of 
customs duties in the system. Again, excise taxation could 
not be practiced by the state governments, since any state 



REVENUES IN THE UNITED STATES 415 

that should begin such a practice would promptly drive the 
taxed production into the jurisdiction of other common- 
wealths. Income taxation, now firmly established, is also 
preferably a source of Federal revenue. To these sources of 
Federal revenue may be added the taxes on transactions, 
though these should be rarely and sparingly levied; and 
perhaps a light taxation of interstate commerce, which would 
be a peculiarly appropriate source of Federal revenue, and 
might offer an opportunity for the regulation of interstate 
business. It is to be hoped that in coming years income 
taxation will play relatively a larger part, and customs and 
excises a smaller part in our Federal system. 

State Taxation. — We have already pointed out the mani- 
fold inequities of the general property tax. There is no 
longer any question that it would be well for our common- 
wealths to abandon as rapidly as possible this source of 
revenue, and also to leave to the local governments the tax- 
ation of real property. The state can easily develop cor- 
poration, franchise, and inheritance taxation until they will 
prove sufficient for state needs. Already several common- 
wealths have made the change, and many others seem pre- 
pared to follow them. Under these forms of taxation, 
personal property will be taxed more certainly and more 
equitably than it has anywhere been taxed under the general 
property tax. 

There are those also who would tax incomes for state 
purposes. In many states this state income tax has been 
so dismal a failure that the possibility of success has been 
generally denied, but in recent years Wisconsin has met with 
a considerable degree of success in levying a state income tax 
and it is probable that other states in the future will achieve 
at least an equal success. Many difficulties involved in 
state taxation of incomes are not encountered in Federal 



416 ELEMENTARY PRINCIPLES OF ECONOMICS 

taxation, and it seems more advantageous, therefore, to 
leave incomes for Federal taxation, and to reserve inlierit- 
ance taxation for the states. 

Local Taxation. — The system thus far outlined would 
leave to the local governments the most convenient and most 
appropriate sources for their revenues. First of all, the 
greater part of local expenditure could be cared for by a tax 
on land, with perhaps a distinct tax on houses and on forms 
of personal property that cannot easily evade the assessor, 
such as luxurious consumer's goods. Any remaining need 
of revenue could be met by taxes on municipal franchises 
or by receipts from municipal ownership and management 
of public service enterprises. 

Such a harmonious system as has been here suggested 
would insure a greater degree of equity, elasticity, economy, 
certainty, and harmony than now obtains in our unsystem- 
atic hit-and-miss forms of taxation. 

SUMMARY 

1. The revenues of the Federal government are derived in great 

part from customs duties, excise taxes, and the income tax. 

2. Customs duties are regressive, inelastic, and uncertain, and 

disturb business ; but their productiveness gives them a strong 
place in the financial system. 

3. Excise taxes on liquor and tobacco are also regressive, but they 

are less objectionable in other respects, and they are con- 
veniently eoUeeted. 

4. The income tax promises to be a very desirable part of the 

Federal revenue system. 

5. States have relied in the past mainly on the general property 

tax, which is unwieldy, unscientific, and inequitable, and 
leads to many sorts of corruption. 

6. PoU taxes no longer play any considerable r6le in taxation. 

7. Taxes on corporations, license taxes, and inheritance taxes are 

in many states taking the place of other forms of taxation. 

8. Local governments now rely mainly on the general property 

tax and license taxation. 



REVENUES IN THE UNITED STATES 417 

9. A balanced revenue system would have the Federal government 

supported chiefly by taxation of incomes and by customs and 
excise taxes ; the state government, by corporation, franchise, 
and inheritance taxes; the local government by a tax on 
land, supplemented by separate taxes on houses, etc., and 
by franchise taxes or by revenues from municipal operation 
of public services. 

QUESTIONS FOR RECITATION 

1. What part of the Federal revenues comes from customs duties ? 

From excise taxes? 

2. What are specific duties? Ad valorem duties? 

3. State and explain the objections to customs duties; to excise 

taxes. Compare the two. 

4. Describe the method of collecting excise taxes. 

5. Discuss the advantages of income taxation. 

6. Describe the main features of the Federal income tax. 

7. What is the objection to taxing transactions? 

8. Describe the evils of the general property tax. How is the 

general property tax levied? 

9. What has caused the recent great development of corporation 

taxation? 

10. What are the advantages of inheritance taxation? 

11. Frame a balanced system of taxation for town, state, and na- 

tion, and explain why each tax is placed where it is. 

QUESTIONS FOR STUDY AND DISCUSSION 

1. Is the general property tax a chief source of revenue in your 

state? Does your state constitution make it difficult or 
impossible to give up this form of taxation? 

2. Does a mortgage on land represent wealth distinct from the 

value of the mortgaged land? 

3. Who bears the tax laid on houses? On the rent of land? 

4. Study carefully the financial reports of your own state and 

community. 

5. Study the geographical distribution of the incomes reported for 

the Federal Income Tax. 

6. Is there a poll tax in your state? Is it generally collected? 

How is it regarded? 



2b 



418 ELEMENTARY PRINCIPLES OF ECONOMICS 



LITERATURE 

Adams, H. C. : The Science of Finance, Pt. II, Bk. II, Ch. VI, es- 
pecially § 73. 

Bastable, C. F. : Public Finance. 

Daniels, W. M. : The Elements of Public Finance, pp. 167-170 and 
pp. 186-191. 

Plehn, C. C. : Introduction to Public Finance, Pt. II, Ch. VIII, § 1. 
See also other references at close of preceding chapter. 

Seliofman. E. R. A. : Income Taxation. 

Urdahl, T. K. : The Fee System in the United States. 



NOTE ON FEDERAL INHERITANCE TAX 

The law of September 8, 1916, discussed on pages 406-407, was 
amended by Act of March 3, 1917, and now the tax on the estates 
of decedents dying after March 3, 1917, is as follows, the net estate 
remaining unchanged : — 



11 % on first 



3% 

4i% 

6% 

71% 

9% 

101% 

12% 

13i% 



next 



S 50,000 

100,000 

100,000 

200,000 

550,000 

1,000,000 

1,000,000 

1,000,000 

1,000,000 



15 % on aU amounts in excess of $5,000,000 



APPENDIX I 



SUBJECTS FOR ESSAYS, DISCUSSIONS, AND 
DEBATES 

The following list is intended simply to be suggestive. 
Students are advised first of all to choose such subjects for 
study as are best suited to the local environment. Thus, 
if the student lives in a rural district, let him first study 
local land values, agricultural rent, farming methods and 
their changes, mortgage indebtedness, the size of farms, 
the business character of farmers, the use of machinery, 
transportation of produce, farmers' organizations, etc., all 
with reference to his own neighborhood. If he lives in 
a manufacturing town, let him study in the same way the 
factory problem, — ■ the extent to which women and chil- 
dren are employed, wages and hours of labor, means of 
preventing or adjusting clashes between employers and 
employed, etc. ; or let him investigate the local rail- 
way problem, — freight rates, safety precautions, acci- 
dents, etc. 

It hardly needs to be said that in selecting subjects for 
debate from the following list, care should be exercised to 
choose only such topics as offer a real affirmative and nega- 
tive, and to frame the question in such a way as to have 
the two sides well balanced. 

419 



420 APPENDIX I 

BIOGRAPHICAL AND PERSONAL 

(Especially for Essays) 

Sketch of the Life of Adam Smith. 

The Life Work of Robert Owen. 

Benjamin Franklin as a Practical Economist. 

Arnold Toynbee. 

Karl Marx and his Theories. 

Henry George and the Single Tax. 

LABOR AND LABOR ORGANIZATIONS 

Economic Causes of the Rise and Fall of Slavery in the United 

States. 
Economic Bearings of Free Land in the United States. 
Indentured Servitude in the American Colonies. 
The Sweating System in our Great Cities. 
The Value and Cost of Child Labor. 
Convict Labor. 

The Economy of High Wages. 
Sunday Labor. 

The History and Prospects of Profit-sharing. 
Voluntary Cooperation in the United States. 
Workingmen's Budgets. 
Old Age Pensions. 

Labor Organizations in the United States. 
Compulsory Incorporation of Trade-unions. 
The American Federation of Labor. 
Compulsory Arbitration in New Zealand. 
National Health Insurance in Great Britain. 
Industrial Education and Vocational Guidance. 
Workmen's Compensation and Industrial Safety in the United 

States. 
Minimum Wage Legislation in the United States and Great 

Britain. 
Systems of Industrial Conciliation, 



APPENDIX I 421 

Immigration into the United States and the Proposed Literacy 

Test. 
Methods for DeaHng with Unemployment. 
Strikes and Lockouts. 
The National Consumers' League. 
Trade-union Labels. 
The National Civic Federation. 
Chinese Labor and the American Standard of Life. 
The Power of Consumers over Conditions of Employment. 
Combinations of Employers and Employees against the Public. 
Government by Injunction. 

LAND AND FOOD SUPPLY 

Agricultural Rents in England during the Nineteenth Century. 

Tenant Farming in Texas. 

Extensive and Intensive Farming in the United States. 

The Relation between Small Farms and Democracy. 

Forest Culture in New York State. 

What Has Been Done with our Public Domain ? 

The Possibilities of Irrigation in our Arid States. 

How Great Cities are Fed. 

MONEY, BANKS, AND BANKING 

Money in Various Climes and Times. 

The Demonetization of Silver in the United States. 

National and International Bimetallism. 

Fiat Money in an Ideal State. 

The English and American Banking Systems. 

Our National Banking System. 

Postal Savings Banks. 

A Visit to the New York Clearing-house. 

Credit in Modern Industry. 

Usury and Usury Laws. 

The Proposed Branch Banking System in the United States. 



422 APPENDIX I 

The Federal Farm Loan Act, 1900. 

Financial Panic of 1907. 

Agricultural Credit. 

The Federal Reserve Board and its Powers. 

Assets Currency. 

COMMERCE, MONOPOLIES, ETCo 

The Advance and Decline of American Shipping. 

Ship Subsidies. 

The Stock Market and its Relation to Industry. 

The Use and Abuse of Speculation. 

The So-called "Money Trust." 

Economic Crises. 

Monopolies, Old and New. 

Trusts, What They Are and What They Do. 

Municipal Lighting. 

The Social Economy and Waste of Advertising. 

The Federal Trade Commission and its Powers. 

TRANSPORTATION 

The Farmer's Interest in Good Roads. 

The Prussian Railway System. 

Railway Combinations in the United States. 

The Interstate Commerce Commission and its Powers. 

River and Harbor Bills. 

How Railway Rates Should Be Determined. 

The Physical Valuation of Railways. 

Public vs. Private Ownership of Public Utilities. 

The Effects of the Panama Canal. 

SOCIAL PROBLEMS 

The Influence of Luxury upon Rich and Poor. 
How a Day-laborer with a Family of Five Exists in the Stu- 
dent's Community. 



APPENDIX I 423 

Tenement-house Life in Large Cities. 

Working-girls' Clubs. 

The Economic and Moral Causes of Poverty. 

The Charity that Pauperizes. 

Immigration and Social Standards. 

Child Labor. 

TAXATION AND THE TARIFF 

Adam Smith on Taxation. 

Taxes that Can Be Shifted. 

Taxation and Perjury. 

The Internal Revenue System. 

The English Corn Laws. 

The Protective Tariff on Sugar. 

The Taxation of Inheritances. 

Reciprocity and Reciprocity Treaties. 

The Wisconsin Tax Commission and its Powers. 

The Federal Income Tax. 

Should the Tariff be Based on the Difference in Labor Cost 

Here and Abroad ? 
Does the Protective Tariff Benefit American Labor ? 
John Stuart Mill on the Taxation of Land Values. 

THE STATE IN INDUSTRY 

Four Views of the Economic Functions of Government: An- 
archism, Extreme Individualism, Moderate Individualism, 
Socialism. 

The Relation of the State to Industry in the United States. 

Fiscal Monopolies in France. 

The South Carolina Dispensary Law. 

The Telegraph in England and America. 

National Workshops in France in 1848. 

Ideal Commonwealths. 

Christian Socialism. 

The Fabian Socialists. 



424 APPENDIX I 

Socialistic Experiments in the United States. 

The Social Democratic Party in Germany. 

Are We Tending toward Socialism ? 

Socialism or Social Reform, Which Shall It Be ? 

Excess Condemnation. 

Socialism vs. Imperialism. 

The Brotherhood of Labor. 

Liberty of the Press in the Socialistic State. 

Syndicalism and the Industrial Workers of the World. 

GENERAL THEORY 

The Theory of Value in Marshall and Bohm-Bawerk. 

The Malthusian Theory of Population. 

The Theory of a Wage-fund. 

The "Lump of Labor" Theory, or the Theory of a Work-fund. 

Money and the Balance of Trade : An Exploded Theory. 

A Study of Human Wants. 

Possible Substitutes for Competition. 

Interesting Cases of Conjunctural Gains. 

What are Economic Laws ? 

The Influence of Climate upon Civilization. 

The Quantity Theory of the Value of Money. 

MISCELLANEOUS 

The Economic Results of the Great Plague of 1348. 

The Irish Famine of 1848. 

What Bad Cooking Is, and What It Costs. 

What Our Community Has to Pay for Intoxicants. 

The Economic Functions of the Church. 

Changes of Fashion in Women's Clothing. 

A Study in Division of Labor. (To be drawn from the stu- 
dent's observation.) 

Our National Ash-heap. (The cost to the nation of inflam- 
mable construction of building.) 



APPENDIX I 425 

An Expensive Luxury. (A careful statistical study of the cost 
of tobacco to individuals and nations.) 

The Cost of War. (A comparative study of the items in vari- 
ous national budgets that are due to wars past or to prepa- 
ration for future wars.) 



APPENDIX II 



COURSES OF READING 

It is believed that both students and teachers may de- 
rive valuable aid from the following selected bibliographies. 
The first group in each case includes works of a relatively 
untechnical character, and therefore constitutes a sort of 
elementary, "minimum" course of special study of the 
particular topic. The books mentioned in the second group 
are in each case more advanced and technical, and may 
therefore be used either for advanced courses of study or 
as works of reference. The authors would suggest that a 
school desiring to form a standard worldng library in Eco- 
nomics would do well to purchase the books mentioned in 
the second groups in the order in which they are named. 

GENERAL ECONOMICS 

Group 1 

Bullock, C. J. : An Introduction to the Study of Economics. 
Devine,.E. T. : Economics. 
Gide, Charles : Principles of Political Economy. 
Seager, Henry R. : Introduction to Economics. ■ 
Taussig, F. W. : Principles of Economics, 2 vols. 
Walker, F. A. : Elementary Course in Political Economy; also 
Briefer Course in Political Economy. 
426 



APPENDIX II 42!7 



Group 2 



Smith, Adam : Wealth of Nations (Cannan Edition). 

Marshall, A. : Principles of Economics. 

Smart, W. : Introduction to the Theory of Value. 

Ely, R. T. : Property and Contract in their Relations to the Dis- 
tribution of Wealth. 

Clark, J. B. : The Distribution of Wealth. 

Mill, J. S. : The Principles of Political Economy. (Ashley 
Edition.) 

Ricardo, D. : Principles of Political Economy and Taxation. 
(Gonner Edition.) (Six chapters in Ashley's Economic 
Classics.) 

Walker, F. A. : Political Economy. (Advanced Course.) 

Patten, S. N. : The Premises of Political Economy. 

Hobson, J. A. : The Economics of Distribution. 

Commons, J. R. : The Distribution of Wealth. 

ECONOMIC fflSTORY 

Group 1 

Ashley, W. J. : Introduction to English Economic History and 

Theory. 2 vols. 
Cheyney, E. P. : Industrial and Social History of England. 
Beard, C. : The Industrial Revolution. 
Ely, R. T. : Evolution of Industrial Society. 
Coman, Katharine : The Industrial History of the United States. 
Hewins, W. A. S. : English Trade and Finance. 
Price, L. L. : History of English Commerce and Industry. 
Warner, T. : Landmarks of English Industrial History. 

Group 2 

BiJcher, Carl : Industrial Evolution. (Translation.) 
Hobson, J. A. : The Evolution of Modern Capitalism. 
Toynbee, Arnold : The Industrial Revolution. 
Wright, CD.: Industrial Evolution of the United States. 



428 APPENDIX II 

Johnson, E. R., et al. : History of Domestic and Foreign Com- 
merce of the United States. 

Rand, B. : Selections illustrating Economic History since 1763. 

Gibbins, H. de B. : Industry in England. 

Cunningham, W. : Growth of English Industry and Commerce. 
3 vols. 

A Documentary History of American Industrial Society. 10 vols. 

Rogers, J. E. T. : Six Centuries of Work and Wages and A His- 
tory of Agriculture and Prices in England. 

Smart, W. : Economic Annals of the Nineteenth Century. 

Ingram, J. K. : History of Slavery. 

THE HISTORY OF POLITICAL ECONOMY 
Group 1 

Price, L. L. : A Short History of Political Economy in England. 
Haney, L. H. : History of Economic Thought. 

Group 2 

Ingram, J. K. : History of Political Economy. (New Edition 
by Scott.) 

Ashley, W. J. (editor) : Economic Classics, including selected 
passages from Adam Smith's Wealth of Nations; six chap- 
ters of Ricardo's Principles of Political Economy; selected 
passages from Malthus's Theory of Population; Mun's 
England's Treasure by Foreign Trade; Jones's Peasant 
Rents; and SchmoUer's The Mercantile System. 

Gide, C, and Rist, C. : A History of Economic Doctrines. 
(Translation.) 

RENT, LAND NATIONALIZATION, AND THE SINGLE TAX 

Group 1 

George, Henry : Progress and Poverty. 
Walker, F. A. : Land and its Rent. 
Fillebrown, C. B. : The ABC of Taxation. 



APPENDIX II 429 

Group 2 

Commons, J. R. : The Distribution of Wealth. 
Clark, J. B. : The Distribution of Wealth. 
Hobson, J. A. : The Economics of Distribution. 
Patten, S. N. : Dynamic Economics. 
Smart, W. : The Distribution of Income. 

MONEY, CREDIT, AND BANKING 

Group 1 

Bagehot, W. : Lombard Street. 

Jevons, W. S. : Money and the Mechanism of Exchange. 

Kinley, D. : Money — A Study of the Theory of the Medium of 

Exchange. 
Scott, W. A. : Money and Banking. 
Walker, F. A. : Money, Trade, and Industry. 
White, Horace : Money and Banking. 

Group 2 

Reports of the National Monetary Commission. 

Report of the Monetary Commission of the Indianapolis 

Convention. 
Kemmerer, E. W. : Money and Credit Instruments in their 

Relation to General Prices. 
Laughlin, J. L. : The Principles of Money and The History of 

Bimetallism, in the United States. 
Dunbar, C. F. : Theory and History of Banking. 
Fisk, A. K. : The Modern Bank. 
Cannon, J. G. : Clearing Houses. 
Conant, C. A. : History of Modern Banks of Issue. 
Sumner, W. G. : History of American Currency. 
Walker, F. A. : International Bimetallism. 
Willis, H. P. : History of the Latin Monetary Union. 
Van Antwerp, W. C. : The Stock Exchange from Within, 



430 APPENDIX II 

Holdsworth, J. T. : Money and Banking. 
Fisher, Irving : The Purchasing Power of Money. 
Hepburn, A. B. : The Contest for Sound Money. 

PUBLIC FINANCE 

Group 1 

Bullock, C. J. : Selected Readings in Public Finance. 
Daniels, W. M. : Elements of Public Finance. 
Lyon, W. H. : Principles of Taxation. 
Plehn, C. C. : Introduction to Public Finance. 

Group 2 

Adams, H, C. : The Science of Finance. 

Cohn, G. : The Science of Finance. (Translation.) 

Bastable, C. F. : Public Finance. 

Seligman, E. R. A. : Essays in Taxation and The Income 

Tax. 
Dewey, D. R. : Financial History of the United States. 
Noyes, A. D. : Thirty Years of American Finance. 
Taussig, F. W. : The Tariff History of the United States. 
West, Max : The Inheritance Tax. 
Howe, F. C. : Taxation and Taxes in the United States under 

the Internal Revenue System, 1791-1895. 

INTERNATIONAL TRADE AND PROTECTIONISM 

Group 1 

Bastable, C. F. : Theory of International Trade. 
Bastiat, F. : Sophisms of Protection. 
Clare, G. : The ABC of the Foreign Exchanges. 
Taussig, F. W. : Tariff History of the United States and Some 
Aspects of the Tariff Question. 



APPENDIX II 431 

Group 2 

Ashley, Percy : Modern : Tariff History. 

Sumner, W. G. : Protectionism. 

Patten, S. N. : The Economic Basis of Protection. 

Wells, D. A. : Practical Economics. 

List, F. : National System of Political Economy. 

Carey, H. C. : Harmony of Interests. 

Ashley, W. J. : The Tariff Problem. 

SOCIALISM 

Group 1 

Brooks, J. G. : The Social Unrest. 
Ely, R. T. : Socialism and Social Reform. 
Howells, W. D. : Letters from Altruria. 
Jaures, J. L. : Studies in Socialism. (Translation.) 
Morley, H. (editor) : Ideal Com.monwealths. 
Reeves, W. P. : State Experiments in Australia and New Zea- 
land. 

Group 2 

Bernstein, E. : Evolutionary Socialism. (Translation.) 

Marx, Karl : Capital. (Translation.) 

Rae, J. : Contemporary Socialism. 

Schaffle, A. E. F. : The Quintessence of Socialism. (Transla- 
tion.) 

Sombart, W. : Socialism and the Social Movement. (Transla- 
tion.) 

Vandervelde, E. : Collectivism. (Translation.) 

Walling, W. E. : Progressivism and After and also Socialism of 
Today. 



432 . APPENDIX II 

LABOR: ITS POSITION, ITS CONDITIONS, AND ITS 
EARNINGS 

Group 1 

Bloomfield, M. : Readings in Vocational Guidance. 

Carlton, F. T. : The History and Problems of Organized Labor. 

Commons, J. R. : Trade Unionism and Labor Problems. 

Gladden, W. : Working People and their Employers. 

Mitchell, J. : Organized Labor. 

Toynbee, Arnold : The Industrial Revolution in England. 

Wright, CD.: Industrial Etnolution of the United States. 

Group 2 

Report of the United States Industrial Commission. 

Report of the Federal Industrial Relations Commission. 

Annual and Special Reports of the United States Labor 
Bureau. 

Ely, R. T. : Property and Contract in their Relation to the Dis- 
tribution of Wealth. 

Hobson, J. A. : The Evolution of Modern Capitalism. 

Schloss, D. F. : Methods of Industrial Remuneration. 

The Pittsburgh Survey. 6 vols. 

Jevons, W. S. : The State in its Relation to Labor. 

Stimson, F. J. : Handbook to the Labor Law of the United 
States. 

Webb, Sidney and Beatrice (Potter) : History of Trade-union- 
ism and Industrial Democracy. 

A Documentary History of American Industrial Society. 

Potter^ Beatrice : The Cooperative Movement in Great Britain. 

Levasseur, E. : The American Workman. (Translation.) 

Gilman, N. P. : Profit-sharing. 

Ashley, W. J. : The Adjustment of Wages. 

Rogers, J. E. T. : Six Centuries of Work and Wages. 

Brassey, T. : Work and Wages. 

Ryan, J. A. : A Living Wage. 



APPENDIX II 433 

MONOPOLIES AND INDUSTRIAL COMBINATIONS 
Group 1 

Ely, R, T. : Monopolies and Trusts. 

Jenks, J. W. : The Trust Problem. 

Lloyd, Henry D. : Wealth against Commonwealth. 

Von Halle, E. : Trusts and Industrial Combinations. 

Meade, E. S. : Trust Finance. 

Ripley, W. Z. : Trusts, Pools and Corporations. 

Stevens, W. S. : Industrial Combinations and Trusts. 

Group 2 

Report of the United States Industrial Commission, Vols. I 

and II. 

Adams, H. C. : The Relation of the State to Industrial Action. 

Bemis, E. W. : Municipal Monopolies. 
Clark, J. B. : Theory of Economic Progress. 

Farrer, T. H. : The State in its Relation to Trade. 

Cook, W. W. : The Corporation Problem. 

TRANSPORTATION 
Group 1 

Hadley, A. T. : Railroad Transportation. 
Johnson, E. R. : American Railway Transportation. 
Ripley, W. Z. : Railway Problems. 

Group 2 

Reports (Annual) of the Interstate Commerce Commission. 

Report of the United States Industrial Commission, 

Reports of the Bureau of Corporations, now the Federal Trade 

Commission. 
Meyer, B. H. : Railway Legislation in the United States. 
Stickney, A. B. : The Railway Problem. 
2f 



434 APPENDIX II 

Dixon, F. H. : State Railroad Control, 

Jeans, J. S. : Waterways and Water Transport. 

Johnson, E. R,. : Inland Waterways. 

Johnson, E. R., and Huebner, G. G. : Railroad Traffic and 

Rates. 2 vols. 
Lewis, G. H. : National Consolidation of Railways. 
Newcomb, H. T. : Railway Economics. 
Ripley, W. Z. : Railroad Rates and Regulation. 2 vols. 

CORPORATIONS AND CORPORATION FINANCE 
Group 1 

Cleveland, F. A. : Funds and their Uses. 

Lough, W. H. : Corporation Finance. 

Meade, E. S. : Trust Finance and Corporation Finance. 

Pratt, S. A. : The Work of Wall Street. 

Group 2 

Report of the Chicago Conference on Trusts. 
Burdick, F. M. : The Essentials of Business Law. 
Greene, T. L. : Corporation Finance. 
Cook, W. W. : The Corporation Problem. 

Emery, H. C. : Speculation on the Stock and Produce Exchanges 
of the United States. 

COMMERCIAL GEOGRAPHY 
Group 1 

Adams, C. C. : A Text-book of Commercial Geography. 
Gregory, H. E., et al. : Physical and Commercial Geography. 
Redway, J. W. : New Basis of Geography. 
Trotter, Spencer : The Geography of Commerce. 
Smith, J. R. : Industrial and Commercial Geography. 



APPENDIX II 435 

Group 2 

Reports of the Department of Commerce and Labor (U. S.), 
especially Commercial Relations of the United States ; 
Commerce Reports ; Monthly Summary of Commerce 
and Finance. 

Thirteenth Census of the United States. 

Chisholm, G. G. : A Handbook of Commercial Geography. 

Keltic, J. S. : Applied Geography. 

In addition to the books mentioned in the preceding para- 
graphs, students will find certain general works of reference of 
very great value. These may be listed most conveniently under 
the names dictionaries, periodicals, and general treatises. 
Every school that aspires to the possession of a working library 
in Economics should have a considerable number of the books 
in the following list, together with some of the magazines of 
most general use in the subject. In the first two groups the 
books and magazines respectively are given in the order in 
which the authors would recommend their purchase. For obvious 
reasons it has not been deemed best to do this in the case of 
the books mentioned in Group Three, which are therefore 
given in the alphabetical order of their authors. The student 
will not find in this book any references to German, French, 
or Italian authorities that have not been translated. Should 
he have occasion, in exceptional cases, to refer to such works, 
he should consult the bibliographies that are to be found in 
many of the general treatises included in our list. 

DICTIONARIES 

Dictionary of Political Economy. Edited by R. H. Inglis Pal- 
grave. 

Cyclopedia of Political Science and Political Economy. Edited 
by J. J. Lalor. 

Cyclopedia of Social Reform. Edited by W. D. P. Bliss. 



436 APPENDIX II 

Cyclopedia of American Government. Edited by A. C. Mc- 
Laughlin and A. B. Hart. 
The standard encyclopedias will also be found to contain 
special articles on very many economic topics. 

PERIODICALS 

Publications of the American Economic Association and the 

American Economic Review. 
The Quarterly Journal of Economics. 
The Journal of Political Economy. 
Political Science Quarterly. 
The Yale Review. 

Annals of the American Academy of Political and Social Science. 
Municipal Affairs. 
The Survey. 

Commercial and Financial Chronicle. 
Bradstreefs. 
Dun's Review. 
The Bankers' Magazine. (American.) 

GENERAL TREATISES 

Bullock, C. J. : Introduction to the Study of Economics. 

Devine, E. T. : Economics. 

Elj^, R. T. : Outlines of Economics ; new ed., rewritten by 

R. T. Ely, T. S. Adams, M. O. Lorenz, and A. A. Young. 
Davenport, H. J. : Elementary Economics. 
Fisher, I. : Elementary Principles of Economics. 
Fetter, F. A. : Principles of Economics. 
Gide, C. : Principles of Political Economy. (Translation.) 
Hadley, A. T. : Economics. 
Marshall, A. : Principles of Economics ; also Marshall, A. and, 

E. : The Economics of Industry. 
Nicholson, J. S. : Principles of Political Economy. 
Roscher, W, : Political Economy. (Translation.) 



APPENDIX II 437 

Seager, H. R. : Introduction to Economics. ' 
Seligman, E. R. A. : Principles of Economics. 
Sidgwick, H. : Principles of Political Economy. 
Taussig, F. W. : Principles of Economics. 
Walker, F. A. : Political Economy. (Advanced Course.) 



INDEX 



Abstinence theory of interest, 344- 
346. 

Adulteration of goods, 85. 

Agricultural stage, 33-36; culmina- 
tion in feudalism, 40. 

Agriculture in England in 1760, 51- 
56. 

American Federation of Labor, 321. 

Anarchism, 377. 

Arbitration, industrial, 333 ; com- 
pulsory, 334-355. 

Australia, industrial arbitration in, 
333. 

Austrian theory of interest, 346-350. 

Balance of trade. See International 
trade. 

Baltimore, ground rents, 297. 

Banking, origin, 47-48; and credit, 
244-259; checks and notes, 245- 
249 ; banks and clearing houses, 
249-252; system of the United 
States, 252-256. 

Barter, disadvantages, 38-39, 188,225. 

Bavaria, Saints' Days, 3. 

Bequests, taxation, 412. 

Bills of exchange, 248. 

BimetalHsm, defined, 236-237 ; Latin 
Monetary Union, 237 ; national 
and international, 238-239. 

Bland-AUison Act, 240. 

Bohm-Bawerk's theory of interest, 
349. 

Bonds, not capital, 129. 

Bonus system, 330. 

Book credit, 249. 

Boycotts, 323. 

Brassage, 230. 

Brewery Workers of America, 321. 



Business, public, 385. 
Business. See Industry. 

Cannibalism, causes, 29-31. 

Capital, defined, 148 ; a factor of 
production, 148-153 ; capital 
goods, 149 ; functions, 149 ; origin, 
150; formation, 151 ; results, 152 ; 
fixed and circulating, 152 ; free and 
specialized, 153 ; organization, 166, 
169 ; increased by credit, 257-258 ; 
interest on, 364-365. 

Census, estimates of wealth, 112- 
113; localization of industry, 167, 
168. 

Checks, 254-255. 

Child Labor, laws, 70 ; Federal Act, 
84-85, 287. 

Christian Socialists, 379. 

Cities, origin, 39. 

Civilization, material, defined, 22. 

Clearing houses, 256-257, 264 

Climate, influence on land value, 298- 
299. 

Coal, production revolutionized, 63. 

Coins and coinage, 229-231 ; bi- 
metallism, 236-238. 

Collectivism, defined, 378. 

Commerce, origia, 37-38. See also 
Industry. 

Commissions, monopoly regulation, 
218; United States Industrial 
Commission, 325 ; Federal Indus- 
trial Relations Commission, 325. 

Communism, defined, 378. 

Competition, beginnings, 46-47 ; 
growth, 77-82; regulation, 83- 
88; and price, 193; wastes, 373- 
374. 



439 



440 



INDEX 



Conciliation, industrial, 333. 

Conjunctural gains, 360. 

Consumption, defined, 91 ; wealth, 
95 ; productive, 95 ; relation to 
production, 96 ; economic order of, 
104^106; Engel'slaw, 112; spend- 
ing and saving, 116-124; luxu- 
rious, 120 ; harmful, 121 ; under- 
consumption, 130 ; and credit, 
259 ; improvements, 305. 

Contract, fundamental institution, 
15-16. 

Cooperation, 160; defined, 331; in 
England and Scotland, 332 ; pro- 
ductive and distributive, 332 ; 
strength and weakness, 333. 

Copyrights, 14, 205. 

Corporations, 159; taxes, 411. 

Cotton industry, change in, 63. 

Credit, economy stage, 21 ; origin, 
47-48; and banking, 244^259; 
defined, 250-251 ; mechanism, 
245-249 ; institutions, 249-252 ; 
in the United States, 252-256; 
Federal Farm Loan Act, 256-257 ; 
clearing houses, 257-258 ; advan- 
tages, 258-259 ; dangers, 259-260 ; 
public loans, 391. 

Crises, explanation, 66-67, 132. 

Cultivation, intensive and extensive 
margins, 303-306. 

Currency Act of 1900, 240. 

Customs taxes, 399^01. 

Debts, 391. See also Loans. 

Demand, 104-114; order of con- 
sumption, 104-106 ; law of sub- 
stitution, indifference, or equi- 
marginal return, 106 ; laws, 108- 
112; influence on price, 196-201; 
labor, 314-315 ; relation to supply, 
343. . 

Differential character of rent, 309. 

Diminishing returns, law of, 138- 
142, 304. 

Diminishing utility, law of, 98-102. 

Distribution, defined, 291-292 ; place 
in economics, 291-292 ; relation 
to factors of production, 293-294. 



Division of labor, 162-166; advan- 
tages, 164 ; illustrated, 16-164 ; 
disadvantages, 165-166. iSee also 
Labor. 

Division of occupation, 161. 

Drafts, 247, 265-266, 268, 272. 

Duties. See Protectionism. 

Economic history, 21-88 ; stages, 22- 
26 ; industrial development, early 
stages, 28-40. 

Economic legislation, in England 
before 1760, 59-60; changes in, 
64-73. 

Economic life, 2, 3 ; unit, 2-3. 

Economic order of consumption, 
104-106. 

Economics, relation to social sciences, 
1-2 ; defined, 2, 3 ; divisions, 5-7. 

Economy, defined, 2. 

Education, economic importance of, 
325 ; pubUc, 387. 

Eminent domain, 11. 

Employers' Associations, 324. 

Engel, Law of Consumption, 112. 

England, Industrial Revolution in, 
51-73; consimiption, 113; ground 
rents, 297 ; agricultural rents, 301 ; 
cooperation, 332 ; national expen- 
diture, 385. 

Entrepreneiu', function, 157; single 
entrepreneur system, 159. 

Equi-marginal return, law of, 106— 
107. 

European War, finance, 385. 

Evolution, nature of, 77. 

Exchange, origin, 33, 178-181 ; ma- 
chinery of, 180, 181 ; subjective 
exchange value, 185 ; objective 
exchange value, 186-188; money, 
the medium of, 225, 227; credit, 
245. 

Excise taxes, 401-402. 

Expenditure, Engel's law of family, 
112-114; public, 384-397 ; public 
finance defined, 384; magnitude, 
385; growth, 386-387; classifica- 
tion, 387-389; objects of, in the 
United States, 389-390. 



INDEX 



441 



Exports and imports. See Inter- 
national trade. 

Fabian Socialists, 379. 

Factories, rise of, 45 ; factory acts, 
70. 

Factors of production, 136-153. 

Faculty theory, 393. 

Federal Farm Loan Act, 256-257. 

Federal Industrial Relations Com- 
mission, 325. 

Federal Reserve Act, 254. 

Federal Reserve Banks, 254-256. 

Fees, 392. 

Feudalism, 40. 

Finance, public, 384-416; defined, 
384. See also Money. 

Fines, definition, 12. 

Fishing tribes, 29. 

Food, consumption, 113, 114. 

Foreign exchange, 262-277. See also 
International trade. 

France, budget, 385. 

Franchises, proper policy regarding, 
86 ; not social capital, 152 ; rev- 
enue from, 413, 414. 

Free coinage, 230. 

Free lands, influence on rent, 302. 

Free trade, 281-286. 

Freedom. See Liberty. 

George, Hemy, 395. 

Germany, insurance and old-age 
pensions, 336. 

Giddings, F. H., on non-competing 
groups, 317. 

Gilds, origin, 39-40, 46; organiza- 
tion, 320. 

Gluts, cause of, 66 ; relation to crises, 
132. 

Gold, advantages for use as money, 
231. 

Goods, inspection in England, 68- 
69 ; in the United States,. 85 ; and 
utUities, 91-96; defined, 91-92; 
free and economic, 92, 93 ; eco- 
nomic importance determined, 107 ; 
production of, 133 ; capital, 149 ; 
representative, 152; transfer, 178- 



181 ; absolutely scarce, 191 ; com- 
petitively produced, 193 ; relation 
of future goods to interest, 348. 
See also Value. 

Government. See State. 

Great Britain. See England. 

Greenbacks, 252. 

Ground rents, 297. 

Handicoaft stage, 23, 36-40. 
History, value of, for economic study, 

5-6, 21-22. 
Housekeeping, economic importance 

of, 123 ; waste in, 124. 
Hunting and fishing stage, 23, 28- 

29 ; tribes, 29, 31. 

Illinois, consumption in, 113. 

Immigration and population, 147, 
148. 

Imports. See International trade. 

Inclosure, meaning, 55—56. 

Income, social, 292 ; private, 292- 
293 ; of the American people, 
405. 

Income tax, federal, 403 ; operation, 
404-405 ; experience, 406. 

Increasing returns, 200. 

Indifference, law of, 106, 107. 

Industrial Commission, United 
States, 325. 

Industrial development, early stages, 
28-40. 

Industrial Revolution in England, 
51-73; results, 65-73, in the 
United States, 75-88. 

Industrial stage, 43-49 ; in England, 
51-73 ; in the United States, 75- 
88. 

Industrial Workers of the World, 321 ; 
and syndicalism, 380. 

Industry, concentration and integra- 
tion, 78-81; regulation, 86-88, 
216; localization, 167-168; or- 
ganization of production, 169; 
state management, 215-221, 376- 
377 ; revenue from, 385. 

Inheritance tax, 406-407, 412. 

Injunctions, 323. 



442 



INDEX 



Inspection of factories, 336. 

Insurance, compulsory, 335; sick- 
ness, 336 ; an element in gross in- 
terest, 352 ; in gross profits, 359. 

Intensive cultivation, 303. 

Interest, 339-355 ; how determined, 
339-340; fallacious views, 340- 
343 ; theories, 343-350 ; rate, 362- 
364 ; usury, 354-356. 

Internal revenue. See Revenue. 

International banking. See Inter- 
national trade. 

International payments, 262-267. 

International trade, 262-288 ; 
nature of, 262-277; rate of ex- 
change, 264-265; balance, 265- 
266 ; relation of war to, 270-272 ; 
value in, 275-277; advantages, 
277; restrictions on, 277-288. 
See also Protectionism. 

Inventions and the Industrial Revo- 
lution, 62-63. 

Investments, 117 ; of labor and capi- 
tal in land, 138-142, 302-306. 

Iron, production in England, 58, 63. 

Jevons, W. S., on monopolies, 219- 
220. 

Knights of Labor, 321. 

Labor, defined, 143 ; a factor in pro- 
duction, 143-148; causes of effi- 
ciency, 144 ; quantity, 144r-148 ; 
organization, 160-166; simple as- 
sociation effort, 161 ; division of 
labor, 161-166; territorial divi- 
sion, 167, 168; and population, 
169 ; intensive cultivation, 303- 
306; and wages, 312-336; supply 
of, 313 ; standard of living, 313 ; 
demand, 314; classification, 317; 
children, 335. See also Labor 
legislation and Labor organizations. 

Labor legislation, purposes, 59-73, 
65, 72, 83-85, 335. 

Labor organizations, trade-unions, 
and the government, 71-72 ; de- 
fined, 319; origin, 320; three 



forms of, 321; growth, 321-322; 
strikes, 322 ; boycotts and injunc- 
tions, 323-324 ; Employers' Asso- 
ciations, 324; influence of the 
public, 324; benefits, 325-326; 
education, 325 ; standard of living, 
326; weaknesses, 326-328; wage 
payment, 329-332 ; legislation, 
335 ; insurance, 336. 

Laissez-faire, 67-68. 

Land, a factor in production, 136- 
137; three services of, 137; or- 
ganization of labor, 167-168; rela- 
tion to rent, 297; quality, 297- 
300; situation, 300-302; rent of 
agricultural land, 302-303 ; inten- 
sive cultivation, 303-306 ; rent of 
urban land, 306-307 ; value, 308 ; 
single tax, 394-397. 

Large-scale production, 170-172 ; 
compared with small-scale, 171- 
173. 

Latin Monetary Union, 237. 

Legal tender, 227. 

Legislation. See urider Economic 
legislation, and Labor legislation. 

Liberty, personal, 16-17; political, 
40. 

License taxes, 411. 

Loan and trust companies, 251. 

Loans, market, 350-352 ; interest on, 
350-352 ; public, 391. 

Lockouts, 322. 

Luxury, 120, 121. 

Malthusian theory of population, 

144. 
Management of industries by the 

state, 216. 
Manufacttire, changes in, 57-58, 62- 

63 . See also Industrial Revolution. 
Marginal expenses, graphs, 197-201. 
Marginal return. See Marginal 

utility. 
Marginal utility, law of diminishing, 

98-102; relation to demand, 110; 

law of equi-marginal return, 140, 

141. 
Market value, 189-191. 



INDEX 



443 



Marriage and population, 145, 313. 

Marx, Karl, scientific socialist, 379. 

Massachusetts, labor legislation in, 
83; consumption in, 113. 

Metals. See Money. 

Money, origin, 38-39, 225; law of 
diminishing utility, 101-102 ; 225- 
241 ; defined, 225 ; functions, 225- 
227 ; desirable qualities of metal, 
227-229; coinage, 229-230; and 
governments, 230-231 ; value, 231 ; 
quantity theory, 232-233 ; cost of 
production, 233-234; prices, 234; 
paper, 234-236 ; Gresham's law, 
236 ; bimetallism, 236-237 ; Latin 
Monetary Union, 237 ; silver, 237- 
238; fluctuations, 238-239 ; recent 
history, 239-241. 

Monopolies, defined, 82, 203 
natural, 82 ; regulation, 86-88 
ownership, 88 ; monopoly value 
193, 203-221; classified, 204 
social, 204 ; government, 205 
natural, 206 ; laws of monopoly 
price, 207-213 ; second class of 
natural, 215 ; public ownership, 
216-219 ; Jevons's criteria, 219, 
220. 

Mortality and population, 147. 

Mortgages, not capital, 129, 152. 

National Civic Federation, 325. 
National Consumers' League, 324. 
National debts. See Debts. 
National defense, 388. 
Nature, a factor in production, 137. 

See also Land. 
"Natural agents," 137, 138. 
Natural rights, 9. 
Natural treasures, 374-375. 
New York State, revenues, 407-408. 
New Zealand, industrial arbitration, 

334. 
Notes, not capital, 152; defined, 

235 ; instruments of credit, 246 ; 

promissory, 246. 

Old-age pensions. See Pensions. 
Organization, of production, 155- 



176 ; of the factors as a group, 
155-160; of labor, 160-166; of 
capital, 166-167; of land, 167- 
168 ; conditions determining, 169^ 
170; of exchange, 180, 181. 

Over-production, gensral, impossible, 
130-131. 

Ownership, public, 216-219; in- 
crease and diffusion, 216; economy 
and efficiency, 216, 217; purifica- 
tion of politics, 217-218; will 
overthrow social monopolies, 218. 

Paper money, 234-235 ; safety, 235- 
236. 

Partnership, 159. 

Pastoral stage, 23, 30-33. 

Patents, 14-15, 205. 

"Patrons of Husbandry," 87. 

Pensions, 387, 388 ; old-age, 336. 

Personal services, 92, 133. 

Piecework, 329. 

Politics, purification, 217-218. 

Poll taxes, 408. 

Population, Malthusian theory, 144 ; 
checks, 145, 146 ; growth, 145- 
148 ; and division of labor, 169. 

Post office, a natural monopoly, 206, 
215. 

Poverty, 317. 

Price, varies with demand, 110; de- 
fined, 189; how determined, 190; 
market and normal value, 190, 
191 ; monopoly, 193 ; and competi- 
tion, 193 ; laws of monopoly price, 
207-213; and money, 231-234; 
relation to rent, 308. 

Private enterprise, proper limits, 16, 
376-377. 

Private property. See Property. 

Privileges, guaranteed, 14—15. 

Production, 126-176 ; varieties, 127 ; 
definition, 128 ; over-production, 
130 ; fluctuations, 132 ; and sacri- 
fice, 132, 133 ; of goods and serv- 
ices, 133; factors, 136-153; land, 
136-137; diminishing returns, 138- 
142 ; labor, 143 ; capital, 148-153 ; 
organization, 155-176 ; large-scale 



444 



INDEX 



and small-scale compared, 170- 
173 ; cost of production and value 
of money, 233-234 ; relation to 
consumption, 96 ; improvements, 
305. 

Productivity theory of interest, 343- 
344. 

Profit sharing, 330. 

Profits, 358-365; definition, 358; 
gross, 358-359, 361 ; pure, 358- 

359, 361-364; monopoly, 359- 

360, 363-364 ; capitalization, 364- 
365. 

Progress and Poverty, 395. 

Property, general tax on, 408-411. 

Property, nature, 9 ; origin, 9-10 ; 
private, justification, 9-10; 
strengthening, 10 ; limitations, 10- 
13 ; public, meaning, 13-18 ; im- 
portance, 293-295. 

Protection of labor, 327. 

Protectionism, 277-288 ; objection 
to, 277-278; argument for, 278- 
281; argument against, 281-283; 
influence of tariffs, 283-285 ; rela- 
tion to labor, 285-286. See also 
International trade. 

Prussia, analysis of consumption in, 
113. 

Public expenditure. See Expendi- 
ture. 

Public finance. See Finance. 

Public loans. See Loans. 

Public ownership, 216—219. 

Public property. See Property. 

Public revenue. See Revenue. 

Public schools, 317. 

Purchasing power, 108-109. 

Quantity theory of money, 232-233. 

Rent, 296-309; meaning, 297; 
ground rent, 297 ; quality of land, 
297-300; situation of land, 300- 
302; agricultural, 302-306 ; lU'ban, 
306-307; relation to value, 307- 
308; defined, 309; and pure 
profit, 362. 

Representative goods, 152. 



Requisition, 11. 

Returns, diminishing, proportionate 
and increasing, 138-142. See also 
Marginal expenses and Marginal 
utility. 

Revenue Act, 403-406. 

Revenue, public, 384-397 ; public 
finance defined, 384 ; classifica- 
tion, 390; public loans, 391; fees 
and special assessments, 392 ; 
taxes, 392-397; United States, 
399-410; federal, 399-407 ; state, 
407-412 ; local, 412-414 ; system, 
414-416. 

Revolution, nature, 77. 

Ricardo, David, theory of rent, 309. 

Rights, not natural, 8 ; fundamental, 
8-18; human, 17. 

Risk, relation to interest, 352 ; rela- 
tion to profit, 359. 

Russia, Saints' Days in, 3. 

Saints' Days in Russia, 3 ; in Ba- 
varia, 3. 

Saving, and consumption, 116-119; 
by hoarding, 117; by investment, 
117. 

Savings banks, 250. 

Saxony, consumption in, 113. 

Scarcity, relation to value, 191, 193. 

Scientific management, 330. 

Scientific socialists, 379. 

Scotland, cooperation in, 332. 

Seigniorage, 230. 

Services, personal, 92, 133. 

Settlement, Law of, 59. 

Sherman Act, repeal, 240. 

Silver, as money, 231 ; bimetallism, 
236-239; limitation of coinage, 
237-238; legislation in the U. S., 
240-241. 

Silver Purchase Acts, 240. 

Single tax, 394-397. 

Slavery, origin, 34; disappearance, 
40. 

Sliding scale, 329. 

Smith, Adam, use of term manu- 
facturer, 57 ; on industrial free- 
dom, 61 ; relations with Watt, 



INDEX 



445 



62 ; on labor laws, 65 ; views on 
protectionism, 279 ; on causes of 
differences in wages, 318. 

Social sciences, 1. 

Socialism, relation to distribution, 
368-369 ; characteristics, 369-371 ; 
claim for distributive justice, 370- 
371 ; an extension of existing in- 
stitutions, 371-372 ; strength, 372- 
374, 377; weakness, 375-377; 
classes, 378-380; in Europe, 380- 
381. 

Socialist parties, 378-380. 

Socialists, views on trusts, 175. 

Special assessments, 392. 

Specific and ad valorem duties, 400. 

Spending, economy of, 119-124. 

Standard of living, defined, 147 ; and 
population, 147, 313, 314; and 
labor organization, 326. 

Standard, The, 395. 

State, passive policy, 18; reaction 
against, 67-73 ; enterprises, 160 ; 
organization of production, 170; 
monopolies, 205 ; management of 
industry, 215-221 ; regulation, 
216 ; economy and efficiency, 216- 
221; ownership, 217-220; coin- 
age, 229 ; money, 230-231 ; labor 
commissions, 325 ; finance, 384— 
416 ; business, 385 ; activities, 
387-389. 

Steam engine, invention of, 62. 

Stock companies, 159. 

Strikes, 322. 

Substitution, Law of, 106, 107. 

Supply, labor, 144-148, 313 ; capital, 
150; relation to value, 190-191; 
of money, 231-234 ; and demand, 
relation, 343. 

Syndicalism, 380. 

Tariff, discussion, 277-288. 

Taxes, defined, 392; just, 393; 
faculty theory, 393 ; direct and 
indirect, 394 ; single tax, 394- 
397 ; customs, 399^01 ; excise, 
401-402; transactions, 402-403; 
income, 403-406 ; inheritance, 406- 



407, 412 ; poll taxes, 408 ; property, 
408-411; corporations, 411; li- 
cense, 411; state and local, 415- 
416. 

Telford, road improvement, 64. 

Temperance and labor organizations, 
325. 

Trade, fluctuations in, 66-67. See 
also International trade. 

Trademarks, 14-15, 205. 

Trade-unions. See Labor organiza- 
tion. 

Trade-union labels, 324. 

Trades, origin, 37 ; and commerce, 
37-38. 

Transactions, taxes on, 402-403. 

Transfer of goods. See Exchange. 

Transportation, early, 48; progress, 
58-59, 63-64. 

Treasiu-y notes, 241. 

Trusts, relation of society to, 173- 
176. 

Under-consumption, 130. 

Unearned increment, 128, 396. 

United Mine Workers, 321. 

United States, economic history, 21- 
88 ; coinage, 237, 239 ; currency 
legislation, 240-241 ; banking sys- 
tem, 252-257 ; public expenditure, 
386-387, 389 ; revenues, 392, 399- 
416. 

United States Industrial Commis- 
sion, 325. 

Urban land, rent, 306-307; single 
tax, 394-397. 

Usury interest, 354-355. 

Utility, 91-96; defined, 91-92; 
varieties, 93-95 ; law of diminish- 
ing, 98-102; marginal, 98-102; 
varies with demand, 110; relation 
to value, 184. 

Value, 183-201; defined, 183; sub- 
jective, 183 ; subjective use, 184 ; 
determined by marginal utility, 
184 ; subjective exchange, 185 ; 
objective exchange, 186-188; and 
price, 188; market, 189-190; 



446 



INDEX 



normal, 190-191 ; and supply, 
190-191 ; absolutely scarce goods, 
191 ; monopoly, 193 ; competition, 
193 ; demand, 194-201 ; monopoly, 
203-221 ; frictional elements, 201 ; 
money the names of, 226; money 
the receptacle of, 227; high 
specific value of metals, 229; re- 
lation to rent, 307-309. 



system, origin, 45-46; fix- 
ing, 60, 312-336; general, 312- 
316; relative, 316-318; methods 
of payment, 329-332. 
War, expense of, 388. 



Wastes, economic, 120. 

Watt, James, invents steam engine, 

62. 
Wealth, individual and social, 129, 

292 ; census estimates, 130. 
Wealth of Nations, 57, 61, 62, 318. 
West Shore Railway, lease of, to 

New York Central, 86. 
Whitney, Eh, invents cotton gin, 

63. 
Women, protected by Factory Acts, 

70; labor, 313. 
Woolen industry, revolution in, 62- 

63. 
Workmen's Compensation Acts, 335. 



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'T^HE following pages contain advertisements of a few 
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Property and Contract in Their Relation to the 
Distribution of Wealth 

By RICHARD T. ELY, Ph.D., LL.D. 

Of the University of "Wisconsin ; Author of " Outlines of Economics," Editor 
of "iThe Citizen's Library," etc. 

Clothi 8vO, 2 vols., $4.00 

A special law library edition, sheep, $7.^0 

" We are indebted to Professor Ely for an excellent book. His style is clear and 
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the distribution of wealth. — Justice Francis J. Swayze, in the Quarterly Journal 
of Economics . 

" Our economists, like our legal writers, have for the most part merely carried 
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has deepened his insight and made him a wiser counsellor of his fellow-men." — 
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